Yet again, we’re seeing a situation where we have a multi-day decline in the three-key market internals when compared with the price of the S&P 500 or SPY ETF.

That sets up a major non-confirmation and increases that odds that we’ll see a price reversal/retracement to test lower levels, barring any unforeseen bullish news here.

We’re seeing the 5-min SPY (or SPX or @ES) chart when compared with Breadth, TICK, and Volume Differential.

For more information on these ‘internals,’ see prior posts:

“March 1 Mid-Day Check on Market Internals”

“Odds Favor Correction by Looking at Market Internals” (Feb 22)

In fact, we’re in the same boat as we were back when I wrote the February 22nd “Odds Favor Correction” post, so take a look at that and you can see the downside resolution that came next.

As a reminder, here’s what happened last time (an update from the Feb. 22 post):

Remember, divergences warn of likely reversals/retracements, but never guarantee them.

The situation is best to take profits if long, hold neutral if your are a risk-averse trader, or consider shorting to profit from any potential downside action if you are a more aggressive trader.

Notice the trendline violations I’ve drawn.  While we could get a bounce or pop off the $112.00 level (looks that way) which is a ’round number’ support and prior swing low from yesterday, odds would shift dramatically to favor downside action if sellers took price under $112.00, so watch that level very closely.

Remember that divergences are like a rubber band that has been stretched, and sometimes when the rubber band – or a market – snaps back, the resolution can be violent, so be prepared in the event history repeats.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade