Monday Morning Check on Bullish Market Internals

Aug 16, 2010: 10:55 AM CST

What are market internals saying about the recent downswing in the market?

Let’s take a look – they’re strangely bullish so let’s see if we get a confirmation of this bullish whisper.

(Click for full-size image)

It’s helpful to interpret market internals across prior days rather than on a single day when trying to assess potential turns in the market.

In this example, we’re seeing the S&P 500 5-min chart of the last four days overlaid with the NYSE Internals:  Breadth, TICK (extremes), and VOLD (Volume Difference of Breadth).

Let’s start with August 12th:

Price gapped down to a new swing low, but ALL THREE market internals rose to higher levels than on the prior day.  Part of that is a factor of how severe (one-sided) the selling pressure was on August 11th, but it’s still a positive divergence.

Breadth actually increased steadily all day with new TICK high extremes coming in just before the close.

In a proof that market internals are not magic, the market did not rebound to the upside immediately on August 13th, but Breadth and VOLD rose for a second session in a row … with TICK forming extreme high divergences in a conflicting signal.

This morning, we have another sharp gap down that was quickly filled, with all three internals spiking to new highs again – look particularly close at Breadth and TICK (extreme) and compare their morning highs to prior price highs.

We have a case where internals are making new (swing) highs but price is not yet making a new high – that’s usually a bullish ‘whisper’ or hidden sign of strength.

But – internals again are not magical and price ultimately is king, so we need a confirmation via price to confirm that a bullish breakout is possible.

That confirmation – should it develop – will come with an upside price break through the upside trendline as drawn at the 1,085 level.  That’s the level short-term traders should be watching, given the hidden whispers of bullish potential strength coming from internals.

UPDATE:  2:00pm CST:

Today shows the importance of monitoring PRICE as the ultimate key – price rallied up to the declining trendline I mentioned earlier just shy of 1,085, paused, internals declined, and then price declined sharply after failing to break above trendline price resistance.

On the alternate view – any price continuation to the downside and breakdown again through the lower trendline at 1,078 and shattering of this morning’s swing low of 1,070 will invalidate the bullish whispers of strength from internals and suggest strong downside price continuation.

Watch these levels to see how price reacts with this bullish turn in market internals.

Corey Rosenbloom, CMT
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4 Responses to “Monday Morning Check on Bullish Market Internals”

  1. Terlyn12001 Says:

    Volume declining while momentum increasing since 8/9/10.

  2. Corey Rosenbloom, CMT Says:

    Agreed – I'd trust anything before I trusted volume signals in this market, particularly during the 'summer doldrums.'

  3. Vinorojo Says:

    It's mutual fund Monday, and was a payday Friday

  4. MadScientist Says:

    Bullish on UCO – oil – has positive divergence this morning on 30 min interval charts.
    New momentum lows were not created.

    Bearish view: Meanwhile, it has broken down UNDER support going back 3 months ago.