Monitoring Market Internals – particularly Breadth – tends to be very helpful for short-term traders to asses market strength or weakness, particularly during a mature rally or decline.
Let’s take a look at the current state of Market Internals and how they have been effective for trading intraday trend reversals and breakthroughs.
The simple price chart above compares the S&P 500 Index with two key Market Internals:
NYSE Breadth: The number of Advancing Issues minus Declining Issues
NYSE VOLD: Volume Difference, which measures Volume Difference of Advancing Issues minus Declining Issues
As the broader Momentum Principle states, we are assessing two things when assessing Internals:
Confirmation – New Price Highs and New Breadth Highs – tends to lead to future continuation of the trend in motion.
Non-Confirmation – New Price Highs and Lower Visual Breadth Highs – tends to lead to a future reversal of the trend.
The same logic is true for a downtrend in motion.
For reference, one could also substitute Volume or a Momentum Indicator in addition to the Breadth/Internals chart above.
What’s the lesson?
As price pushed to the 1,270 level (which was a Higher Timeframe key support region), both Breadth and VOLD registered visual higher lows when compared to the readings on June 1st.
This was a Market Internal divergence that suggested potential reversal – or at a minimum, that the selling phase was in the late stage.
Mid-day, price broke a falling trendline and indeed completed an intraday trend reversal.
June 5th and 6th showed clear strength in internals as price developed a new uptrend with bullish price action, particularly that of June 6th.
However, June 6th – with price closing at the 1,310 level – registered the highest level of Breadth and VOLD.
Remember, strength in internals – when confirmed with price – tends to lead to a continuation of the price trend in motion.
The future sessions did result in higher prices, with spike intraday highs coming off the day’s open.
Monday June 11th revealed a surge and strong gap higher above 1,330… yet a quick glance at Breadth and VOLD showed a non-confirmation or visual divergence.
The lengthy intraday trend and prior declines (weakness) in Market Internals were warning or caution signals of potential price weakness.
Monday’s session developed a sharp sell-off from the open, falling from a new (recent) price high all the way back to the price low – and potential support level – into the 1,310 region.
So far, June has been a good lesson in applying Market Internals to short-term (intraday) price charts for additional information “behind the scenes.”
Continue monitoring Internal strength or weakness with short-term trends and price movements.
Corey Rosenbloom, CMT
Afraid to Trade.com
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