Morning Check on Market Internals May 5

May 5, 2010: 10:10 AM CST

After Tuesday’s sharp sell-off took price to the rising 20 day EMA, the morning session on May 5th greeted traders with a swift breakdown of the 1,170 level… but it did so on slightly stronger relative market internals.

Let’s see an updated chart and what levels to watch for reference for today’s trading session.

We did have a 10 point morning sell-off, but at the lowest point (1,158), ALL three key market internal indicators were above where they registered on yesterday’s low of 1,169 just before the close.

That marks a positive divergence in the three key market internals – Breadth, TICK, and Volume Difference – which should give intraday short-sellers a bit of pause while the dust settles.

Positive divergences do NOT mean that price is required to reverse, but sends a caution signal to monitor price closely and not let your bearishness get the best of you.  Keep watching new developments through the day closely.

It would be a very bullish turn of events, triggering a potential reversal of short-term down trend, if buyers can push prices back above the 1,170 level, or to be safe, above the resistance level from yesterday’s close at 1,175.  That would likely trigger a ‘short-covering’ rally higher.

However, 1,170 is the key price level to watch, as it still remains the 50-day EMA and is a ’round number’ level.

Watch to see if sellers step up here and trigger a ‘bear flag’ sell signal, which would be triggered if we break back under 1,165.  Remember that 1,150 is the key level to watch as a major reference point, and would be the logical target if we break back under 1,160.

Keep a close watch on market internals and price as it interacts with these reference levels – 1,170 as a line, 1,175 as a bullish breakout level and 1,165 as a bearish line and 1,160 as a bearish breakout level.

Corey Rosenbloom, CMT
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7 Responses to “Morning Check on Market Internals May 5”

  1. terlyn Says:

    I did not count on a gap fill today.

  2. terlyn Says:

    Bull trap? I'm getting killed.

  3. Corey Rosenbloom, CMT Says:

    Looks like it was more of a bear trap than a bull trap.

    The day did open up with distinctly positive divergences in internals after the early sell-off to the 1,160 level.

    Internals usually give the clues as to the short-term direction.

  4. terlyn Says:

    Thanks, Corey, do you think, though, that there was a gap fill at the open, and that is why the market turned up? I wasn't careful enough about market internals. Oh boy! I I was cautious about popped stops, so bought after a break over 153, that's what I'm calling a bull trap.

  5. terlyn Says:

    On a positive note, I did see the doji and bearish engulfing and did get out.

  6. Corey Rosenbloom, CMT Says:

    We never know the exact reason why a market does something – we can only anticipate and react based on historical patterns.

    The buyers have been mocking the sellers it seems, using any confirmed breakdown (bearish short-sale entry) as a buying opportunity that jams the market higher into popped stops territory so perhaps that was the same pattern repeating.

  7. Christine Says:

    I completely agree. My newsletter from informed me to stop trading a few weeks ago… right now it is just best to stay with what you have. Almost everything is increasing with time, and by trading you are going to cost yourself money and put yourself at more risk. Thanks for the back up.