MultiDay Check on SP500 Market Internals on Jan 6

Jan 6, 2010: 1:34 PM CST

It’s time for another check-up on intraday market internals in the S&P 500!  Market Internals – looking under the hood of the market – can help warn (foreshadow) turns in price in advance.  As such, it is important to keep tabs on key market internals as an intraday trader, or even for a swing trader.

Let’s take a look at the current ‘X-ray’ of the Market Internals for the last few trading days.

We’re seeing the 20min S&P 500 (symbol $INX in TradeStation) with Breadth, TICK, and Volume Difference in the three panels.

I want to call your attention to two periods in the recent past in regard to divergences and reversals.

Market Internals began to form higher lows as price formed lower lows (positive internal divergence) as we ended 2009 (Dec 31).  The lows in internals – Breadth, TICK, and $VOLD – were made on December 30… if you magically erase the sharp sell-off in the final 25 minutes of 2009.

Ignoring that bit of information, we now turn to the present.

Market Internals all formed their recent highs on January 4th, 2010 though price has continued higher on lower highs in each Internal Indicator – that is a negative divergence.

New Market Internal Highs often precede New Index (price) Highs… while non-confirmations or lengthy divergences often precede price reversals.

Given that, price is rising on falling internals, particularly in regard to TICK and Volume Differential Highs (you can see the divergence with a red arrow).

Breadth is forming a lower peak, though the line is rising, thus Breadth is the only major market internal shown above that is … somewhat … confirming higher price highs.

It is a warning to watch price closely for any signs of weakness, and be prepared to act (sell or short) on that weakness.  Watch also for any sudden new highs in market internals to confirm any new price highs.

For reference:

BREADTH:  NYSE Net Advancers on the session minus Net Decliners on the session ($ADD)
TICK:  NYSE TICK – NYSE Stocks “ticking up” at a given moment minus those “ticking down” ($TICK)
VOLUME DIFFERENCE:  Volume Flowing INTO Advancing Stocks on the session minus Volume Flowing INTO Declining Stocks on the session ($VOLD)

With the exception perhaps of the $VOLD, you should be able to replicate this chart in your trading software/platform.

I will be explaining this concept/strategy in more detail along with more specifics in trading tactics in our upcoming extended premium webinar entitled

Price Principles and Trading Strategies to Gain Your Trading Edge” sponsored by TraderInterviews.com.

For more topic information and to sign-up, visit the “More Information and Registration” page.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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