Odds Favor Correction by Looking at SP500 Market Internals

Feb 22, 2010: 11:15 AM CST

Updating a similar theme from the end of last week, a current ‘updated’ view of market internals of the S&P 500 show further deterioration, which underscores the heightened probability – but not certainty – of a market correction this week.

Let’s see the updated chart:

See my previous update from February 18th:

“S&P 500 Breaks Resistance on Declining Market Internals”

The position and analysis remains eerily similar, only we’re higher now than Thursday, and on even lower differentials in key market internals.

This would be analogous to a car rolling forward on fumes… still rolling forward, but every mile traveled uses up what little fuel remains.

Either the car is going to have to be refueled with gas… or the car will stop (and roll backwards down the hill).

The current rally moves forward not just on declining market internals, but also volume… and volume has been compared many times to the “gas in the engine.”

If that’s true, then the market’s fuel tank for further upside is empty and extreme caution is warranted on both sides.

I say both sides because the risk of a pullback is high, so it is perhaps more risky to be long at this exact point in time, but because we have not yet (as of 11:00 EST) seen key breakdowns of short-term (intraday) moving averages or trendlines, though it is also ‘aggressive’ to get short just because divergences exist.

It’s better to observe the divergences, realize what they mean, and then wait to trigger entry (trade execution) once we see price break both lower timeframe moving averages and any rising trendline you can draw intraday that connects the lows of the rally (which would be about the 1,105 level).

Remember, at any point, buyers could step in and “fuel” the engine, driving prices higher and strengthening the position of market internals. But until that happens, odds strongly favor the downside.

For reference, Breadth refers to the net difference of NYSE Advancing Stocks on the Day minus Declining Stocks on the day (the current number 127 means there are 127 more stocks advancing right now than declining.  The line tracks the net difference over time).

TICK refers to the NYSE stocks making up-ticks minus down-ticks at that exact moment in time.

Finally, VOLD refers to the “Volume Difference” of NYSE Volume flowing into Advancing Stocks (recall Breadth) minus volume flowing into Declining Stocks.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

6 Comments

6 Responses to “Odds Favor Correction by Looking at SP500 Market Internals”

  1. bigmovingstock Says:

    these are great charts pointing out the bigger picture in the market – thanks for posting – for now it seems the market wants to just keep churning higher – I agree though that the internals are looking bearish

  2. Corey Rosenbloom, CMT Says:

    That's right – that's why it's risky to be short and risky to be long, when price has moved up so steeply (but showing few signs of stopping) on each day seeing declining momentum, volume, and internals.

    Can't execute short only on a divergence, but can't really get long either because the risk of reversal is high. Better to trade (unless intraday) when we're not seeing such glaring non-confirmations.

  3. bigmovingstock Says:

    these are great charts pointing out the bigger picture in the market – thanks for posting – for now it seems the market wants to just keep churning higher – I agree though that the internals are looking bearish

  4. Corey Rosenbloom, CMT Says:

    That's right – that's why it's risky to be short and risky to be long, when price has moved up so steeply (but showing few signs of stopping) on each day seeing declining momentum, volume, and internals.

    Can't execute short only on a divergence, but can't really get long either because the risk of reversal is high. Better to trade (unless intraday) when we're not seeing such glaring non-confirmations.

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