May 2008: The Last Time We Saw Major Breadth Divergences Like This

Oct 30, 2009: 6:06 PM CST

This morning, I wrote about the lengthy “Market Internal” non-confirmations or glaring negative divergences that are creeping in to undermine the current stock market rally.

Let’s step back in time to May 2008 – the peak of a counter-trend rally and the last time we saw such glaring non-confirmations with market internals and price… just before a major reversal.

(Click for full-size image)

Please refer back to the earlier post “Daily Market Internals Now Failing to Confirm Market Rally” for a definition of the two lower-panel indexes/indicators.

The main idea is that the “Breadth” or “Advancers minus Decliners” is a way to look ‘underneath the hood’ of the market to see the true strength – or weakness – of a rally (or retracement) in price.

At the beginning of the move, the internals confirm price by spiking or concentrating at higher absolute levels.  As the rally gets “old” or “long in the tooth” (nearing an end), then the Internals begin to form negative divergences, and reverse direction ahead of the price.

Thus, internals can be referenced as a type of leading indicator.

Price rallied off the March 2008 lows with stronger Breadth and Volume readings (difference in “Up-Volume minus “Down-Volume”) and the rally continued.

In May, it became clear that the internals were turning lower while price was moving higher… like a car sputtering forward on an empty tank of gas driving up a hill.  Once the gas runs out… the car will slow to a stop and begin rolling backwards down the hill.

We know that price continued much lower not only in the short term but in the long term after this chart was captured.

If history is any guide, we could be looking at the same car (stock market) rolling up the same hill on fumes… about to reverse course.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

6 Comments

6 Responses to “May 2008: The Last Time We Saw Major Breadth Divergences Like This”

  1. zstock Says:

    Any chance SPWRA can get back to $27

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  3. Dan de Man Says:

    Thanks as usual Corey, I was looking at these charts and charts of the price action in Oct 08 – Dec 08. Your interview with Larry Connors got me thinking the RSI(2) strategy may work in the coming trading environment. Although triggers of 25/75 may be too loose; triggers of 5/95 may give more higher probable results.

    Cheers,
    Dan

  4. Dan de Man Says:

    Thanks as usual Corey, I was looking at these charts and charts of the price action in Oct 08 – Dec 08. Your interview with Larry Connors got me thinking the RSI(2) strategy may work in the coming trading environment. Although triggers of 25/75 may be too loose; triggers of 5/95 may give more higher probable results.

    Cheers,
    Dan

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