Just How Much Higher Can this Thing Go on Negative Internals?
Jun 16, 2010: 11:57 AM CSTThat is the question! Price is one part of the equation, internals (volume, breadth, TICK, etc) are another.
Before I show the charts, realize that price is king, and that price moves according to supply/demand imbalances between buyers and sellers, and everything else we use (indicators, internals, etc) are there to help us see the conviction or the extent of imbalance between supply and demand.
So when price moves up and the “other” things we use to monitor price move down – like momentum oscillators, internals, volume, etc – then this is a classic “non-confirmation” and it warns us to be more cautious and careful, and not rush out and buy rampantly because there are hidden “cracks” in the foundation that are showing if you look for them.
And… that’s exactly what’s happening right now in terms of key market internals during this rally off the June 8th low – which had its own set of obvious positive internal divergences before the reversal that ‘forecast’ a reversal.
Let’s see the current state of price and market internals during the rally:
(Click for full-size image via Chart.ly)
For a reference, look at the green arrows that show the positive Breadth and VOLD divergences that “undercut” (failed to confirm) the June 8th price low that forecast a likely reversal… that occurred.
Now, we are seeing the opposite picture… price has ticked its way to a new swing high outside the key 1,110 level, but it did so on weaker volume (not shown) and internals.
Instead of getting too complex, pay attention to the recent values of Breadth and VOLD on today’s intraday high as of 11:00am CST:
Price pushes to new recovery high at 1,117 with the following daily market internals:
Breadth: -250 (that means 250 MORE stocks were negative on the session than positive… at a new intraday high)
VOLD: -72,000 (meaning volume was seen as flowing more into declining shares than advancing shares)
It’s one of those market facts that makes your head spin.
So price makes a new high but is undercut by volume and internals – that is NOT the picture of bullish strength you expect to see on a breakout of a key resistance level.
As Mark Douglas says “Anything can happen in the market,” so we could certainly see price continue its rally which will leave many traders scratching their head as to “where’s the volume?” and “where’s the corresponding strength in internals?”
However, if the signal from internals are correct – and we’ll know sooner than later – then we are looking at a Bull Trap that will likely lead to a reversal back down under 1,110, 1,100 and likely even lower… as the floor collapses from under the price.
Watch closely with an open mind until we get a resolution one way or the other.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
