Massive Internal Divergences Predict Intraday Trend Reversals

Apr 30, 2009: 2:43 PM CST

Using today’s price action so far as an example, let me walk you inside the price action for April 30, 2009 in the SPY to discover that massive TICK, Breadth, and Momentum divergences all formed, clueing you in that a price reversal was far more likely than price continuation.  Let’s walk through the market internals quickly to see how knowledge of this concept could have led to profits.

Let me walk you through this chart step-by-step so you can make the most of it.

The main idea to learn is that a TICK and Breadth divergence formed as price made weak new highs, and the doji reversal candles at the highs – complete with TICK, Breadth, and Momentum (not shown) Divergences all signaled a powerful low-risk short-selling opportunity that was irresistible.

To show this, let me explain the functions on the chart.  We’re looking at the 1-min SPY (S&P 500 ETF).  Underneath (in blue) I’m showing the TICK (number of advancing stocks on an uptick at the moment minus number of declining stocks on a downtick).  On the third line, I’m showing just the Number of NYSE Declining Stocks ($DECL) – usually you look at this in conjunction with the Net Advancing Stocks ($ADV) but the hidden signal came from the advancing stocks remaining the same but there was a steady ebb upwards in the number of stocks that switched to declining on the day – that’s what I want to show).

Finally, I’m showing the classic Breadth, which is the ‘spread’ using the formula $ADV minus $DECL (or number of advancing stocks positive on the day minus the number of declining stocks negative on the day).

Moving right along, price began the morning with an overnight gap (not shown as to focus on the chart scaling – I cut off the first few opening 1-min bars), so people assumed underlying strength in the market and most likely ‘went long.’  Price did continue its trek higher, breadth slightly expanded, and the TICK registered a marginal high at 10:15 EST.  The SPY traded at $88.90.

Price swung back down for the next hour and then made a new high on the day at $89.00.

However, look very closely at the Market Internals.  At the same time price made a new swing high above its $88.90 morning high, the following took place:

The TICK registered a lower high reading than the morning (1015 at the morning high vs 672 for the absolute high of the day)

The $DECL Decliners line registered a higher reading (more stocks were down on the day at the afternoon high than the morning high… the morning high saw 507 stocks down on the day while the afternoon high saw 593 stocks down on the day – almost 100 stocks were now trading lower on the day than the were when the SPY made a prior intraday high)

The Breadth (spread) line registered a lower reading than the morning high.  The “Breadth” line in the morning high showed a positive value of 1,870 difference in ADV and DECL while the afternoon $89.00 high showed a breadth difference of 1,780 – again, almost 100 stocks different)

The 3/10 Momentum Oscillator (not shown) also registered a higher low, carving in a negative momentum divergence on the 11:20am high.

Taken together, the “Weight of the Evidence” showed odds overwhelmingly favored for a downward move rather than an up-move.  Or stated differently, the 11:20am high was not confirmed by strength as indicated by the Market Internal readings.  Such non-confirmations and divergences almost always result in actual price reversals.

Take time after the close to study your charts so that you’ll see more of these developments in real-time as they occur – and know what to look for in advance as the day progresses.

Corey Rosenbloom, CMT
Afraid to Trade.com

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18 Comments

18 Responses to “Massive Internal Divergences Predict Intraday Trend Reversals”

  1. gawed Says:

    i’m using firefox 3.0.10 and i can’t see the chart :S am i the only one having this problem?

  2. Corey Rosenbloom Says:

    Oh no!

    I’m using it off my account at Chart.ly. I’m using Firefox 3.0.10 as well.

    If anyone else cannot display the chart, please let me know here asap and I’ll put it up under Flickr.

  3. gawed Says:

    well Corey, if you have the same version of firefox and can see it then the problem must be me and something in my configuration or something :S

  4. Anonymous Says:

    You da man, Corey.

    -win

  5. Anonymous Says:

    thank you I am learning so much from your blog

  6. Jack Parsons Says:

    Thanks very much! This type of advanced analysis is rarely available for free; not that I can put it to good use, but it really does help demonstrate the interplay of the indicators. Found you on slope of hope.

  7. Corey Rosenbloom Says:

    Thanks Anon! Glad to have you as readers.

  8. Corey Rosenbloom Says:

    Jack,

    It’s fun for me – sharing these thoughts and observations. It makes me accountable and, by nature of teaching, a better trader/analyst myself. It’s almost like my private daily journal made public – which is originally why I started the blog (to share thoughts and connect with others).

    As long as it stays fun, I’m happy to share!

  9. Anonymous Says:

    Great job, Corey! I read your blog everyday.Thank you so much!

  10. Pankaj Says:

    Hi Corey!
    Where is SPY and/or $INDU headed to in next 3-4 days? Going down or up based on your confluence zones analysis? Thanks!

  11. Anonymous Says:

    Corey do you have a screen open during the trading day which provides you with this live tick by tick data ? If so could you steer me in the direction where I can get it?

  12. joe Says:

    Corey do you have a screen open during the trading day which provides you with this live tick by tick data ? If so could you steer me in the direction where I can get it?

  13. Hardev Singh Says:

    Dear Sir,
    Smaller triangle ( formed after 17 April)is likely to break down since price has completed 5th wave withing the Rising wedge & price is converging in the last lap , but it will be limited fall as magnitude of the 1st wave works out 66.78, between 20-28 March, from the recent top 888.7, on 30 April, the target works out to be 826.75 hence is lkely to find support at confluence 50 EMA This may also result in a double bottom But if there is further deterioration of price then the Rising wedge will breakdown ( Consider line joining 20th March & 30th March is closer to the 50 EMA & projected target in case of smaller triangle break down)THAT IS WHY I SEE THE WEDGE BREAK DOWN IS ON BREAK DOWN FROM THIS LINE (Presumption before the breakdown could be dangerous as i can see the MACD Osc 3,10,9 Histogram RSI & ROC have started forming Rising bottom & falling tops which is bullish

  14. Hardev Singh Says:

    Further to the above discussion, In case of Rising wedge breakdown the Price Target will 752-753 That is confluence with 61.8% Retracement of Rally from March Low

  15. Corey Rosenbloom Says:

    Thanks Anon!

    Pankaj,

    If only it were so easy! Odds favor downside action based on overextension, divergences, etc but those negative technical aspects haven’t stopped the bulls yet so who’s to say this will?

  16. Corey Rosenbloom Says:

    Anon,

    Yes, I have a screen just for market internals. I’m using TradeStation in charts/workspaces I’ve set up which have been inspired by others, so that’s all I’m familiar with.

    Other programs should give you the TICK, Breadth, TRIN, etc it’s just a matter of configuring them into a screen that makes sense to you. Then the experience of knowing what the nuances are and how to interpret them as they occur in real time.

  17. Corey Rosenbloom Says:

    Hardev,

    Good analysis! Thank you for sharing.

  18. sam44343 Says:

    easier said then done