Measuring Current SPX Market Internals After Strong Rally

Sep 23, 2010: 9:45 AM CST

What do market internals say about the current structure of the S&P 500 (broader stock market)?

You might guess they’re diverging and you would be correct, but let’s pull the perspective back and see the complete rally off the recent August low of 1,040 to the present September peak at 1,140.

S&P 500 with Market Internals:

There’s an interesting lesson you should be aware of before we discuss current internals.

Look closely at the spike up to new highs in all three market internals at the beginning of September when price launched off key support at 1,040.

I call this specifically a “Kick-off” – which is when Market Internals make new visual highs but price does NOT.  It usually occurs in conjunction with a breakout or powerful move off key support – like this.

It’s a great lesson.  It suggests that higher prices are yet to come in a new short-term trend burst – which is exactly what happened.

But since then, market internals have not reached the indicator peaks they met at the start of September.  That’s not necessarily a bad thing, just a caution signal.

More recently, I highlighted the price high so far on September 21st at the 1,144 level as a result of the Fed Decision Reaction.

Despite this new high in price, none of the three market internals – Breadth, TICK, nor Volume Difference of Breadth – made new indicator highs.

That’s your classic non-confirmation and ‘market internal’ divergence.

It suggests weakening and deterioration of the mature short-term impulse move that began in September and bulls should thus be on guard.

That doesn’t necessarily mean bears should rush out to short… that is, unless we get a firm price move under the trendline I’ve drawn at the 1,125 level.

A price breakdown under 1,125 or 1,120 would be a signal that the divergences were ‘working’ and the market was unwinding to the downside to correct (retrace) the upward move.

With the divergences in place, be careful and be on guard for any sudden downside move… or on the flipside, any sudden strengthening of market internals (which would be a bullish confirmation).

Corey Rosenbloom, CMT
Afraid to Trade.com

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

6 Comments

6 Responses to “Measuring Current SPX Market Internals After Strong Rally”

  1. panepon Says:

    If market hit 1,1250 or 1,120 or under these prices, can I short even after the market close?

  2. Macdee Says:

    I dont beleive you can short in the after hours session. But you could by an of the short ETFs.

  3. Stroot3 Says:

    Hi Corey,

    When using $ADD, $VOLD and $TICK to compare to S&P should you use the same timeframe?

  4. Corey Rosenbloom, CMT Says:

    Hi Stroot,

    Not necessarily – the data will not change, but the way it's displayed will. You can see finer details on the lower frames and make trading decisions – such as trading TICK divergences – but the Breadth and VOLD are often better seen on higher (30, 60, etc) charts to get the multi-day “picture” of internals.

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