Monday Morning Check on Stock Market Internals Dec 12

Dec 12, 2011: 1:37 PM CST

How have market internals given us clues about the last two short-term stock market reversals, and what are they saying currently?

Let’s check out the 30-min intraday S&P 500 Chart of Breadth-based Market Internals:

What we’re seeing above (click for full image) is the S&P 500 with the NYSE Breadth and NYSE Volume Difference of Breadth (two of the “Big Three” Market Internals – the other is the NYSE TICK).

Breadth measures the number of advancing issues minus declining issues at a specific moment in time, while Volume Difference (VOLD) takes into account the difference in Volume Flow of Advancing and Declining issues.

The key is to look for internal confirmation with price or non-confirmation (in the form of visual divergences).

Let’s focus mainly on the non-confirming divergence of November 25th (a positive divergence at the lows) and the recent December negative divergences at the highs ahead of the current ‘retracement/sell’ phase.

Reference my November 29 Update on Market Internals to see how the picture looked in real-time then, and of course how the signals from internals successfully played out positively (as expected) for the market.

Use that as a clear educational example of how the concept is ‘supposed’ to work (nothing is perfect though).

That brings us to our current decline in Market Internals (inner strength) while price rallied on “fumes” ahead of the recent ‘turn-around’ into the 1,260/1,270 target level.

Let’s take a closer look at the current picture:

A 5-min multi-day (intraday) chart allows us to see more detail that may be missed from the higher timeframes.

First, we see the November 25th positive divergence and resolution with two big “Confirmations” from Internals – November 28th and November 30th (when Central Banks intervened).

Strength in internals tends to PRECEDE strength (or follow-through/continuation) in price, as you can see from 1,230 (Nov. 30th) to 1,270 (Dec. 5).

Short-term price swings never last forever, and we often see deteriorating Internals (along with raw Volume and Momentum) ahead of short-term reversals (or retracements).

That’s what we saw last week and we’re seeing price follow-through in the retracement/downward direction after locking in negative Internal divergences.

We’re also seeing a type of “Rounded Reversal” or “Arc” Price Pattern, but that’s another story.

The key NOW is to watch for any sudden surge of bullish buy-ins or profit taking from short-sellers off the 1,220 important confluence support.

If buyers do not step in to stop the tide of selling at 1,220, we’re likely to see a continuation back to 1,200 as the next target and then if the market trades at 1,200, we’ll see if divergences exist at 1,200 in real-time.

Today’s sell-off puts the market focus on the 1,220 confluence, so keep your attention there as a short-term “make or break” level in the context of signals from Market Internals.

Corey Rosenbloom, CMT
Afraid to Trade.com

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