I wanted to highlight a curious situation with Market Internals in respect to the recent breakthrough above 1,600 in the SP500 (and 15,000 on the Dow Jones) and note the message from Internals.

While internals are always secondary to price, it’s still important to listen to the message sent by the number of stocks advancing minus those declining (Breadth) with respect to the movement of the equity index itself.

Here’s two perspectives on the “Collapse” in Internals with respect to the surge in equity prices:

The first chart shows us the full April period (to present) with respect to NYSE Breadth ($ADD) and Volume Difference of Breadth ($VOLD).

To recap, a Breadth reading/indication is the difference (subtraction) between advancing issues (those positive on the session) and declining issues (those negative on the session).

The red highlighted periods signify phases of Divergences or Non-Confirmations with respect to price (falling internals with rising prices) while the one green period shows dual positive divergences.

The MAIN LESSON is that price so far has been shaking-off or ignoring the message from internals, meaning the trend dominance overrules the signals from internals.

As the old saying goes, like volume divergences, internal divergences do not matter “until they do” (until price reverses as was the case the last time we saw a price decline from April 11th to the 19th).

A closer perspective drills into SP500-specific internals for a clearer picture:

The 5-min chart above uses only the stocks in the SP500 to calculate the Breadth reading (meaning an indication of 400 signifies that roughly 450 stocks are positive at that moment against 50 which are negative at that moment in the trading day).

The colorful indicator under $ADSPD (SP500 Advance-Decline Difference) is simply a visual representation – a color-coded histogram – of the breadth indicator for clarity.

Numerically speaking, the chart peak of SP500 Breadth occurred straight off the open on May 3rd (the “Jobs Report” breakout day) when the indicator registered a session high of 455.

We can see price creeping its way powerfully higher in pro-trend fashion, yet along the way, internals quietly diverged with the price index.

In fact, with a new all time headline-grabbing index high into 1,635, internals barely managed to poke their head above the zero-line, registering a session high reading of 46.

At the all-time high, 273 SP500 stocks were positive on the session against 227 which were negative at that time.  For the period before and after the intraday high, more SP500 stocks traded negative on the session than were positive (which is logical since the index spent the majority of the session negative).

What’s the bottom line?

Trends can most definitely continue (or extend) beyond what most traders feel like they should, and as such, price is the ultimate arbiter of our decisions, not internals or indicators when messages conflict (this includes other forms of analysis as well).

Nevertheless, we do look “beneath the market” to assess the strength or health of a price swing or trending impulse in motion.  We do this to gather clues with respect to leverage, trade management, and game-planning.

A market moving up with strong volume and internals has greater odds of continuing (reference the big bullish confirmation on May 3) and thus we can trade more aggressively with larger targets and greater confidence during these periods.

A market steadily moving up on declining volume and internals has reduced odds of continuing and thus we need to be more cautious, less aggressive, use tighter stops, and play for smaller targets when compared to the opposite type of bullish confirmation environment (again, reference early May).

It’s easy to get caught up in bullish headlines and sustained trend moves, but for long-term trading success, it’s often better to be more aggressive with our pro-trend trades when a price trend is confirmed by volume and internals, not contradicted by it.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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What looks like a “can’t miss” trading opportunity on one timeframe may be an equally compelling “can’t miss” opportunity on a higher timeframe, but in the exact opposite direction.

In other words, what looks like a grand breakdown opportunity on a Daily Chart may be a high probability bull-flag retracement set-up into support on the Weekly Timeframe.

That’s exactly what happened in April with Google’s chart so let’s take a quick moment to see this situation and take a moment to review the importance of using more than one timeframe for our trading decisions, if only for a filter.

Here’s the Daily Chart of Google (GOOG) as it developed a breakdown short-sell opportunity on April 18:

After a persistent uptrend that began with the November low, a natural pullback or retracement developed through March and April.

Generally, the dividing line between a retracement (pro-trend) expectation and a reversal (trend reversal) outcome is how price behaves relative to trendlines and rising moving averages.

For example, the breakdown and volume spike into April suggested Google shares were headed for a logical reversal instead of a pro-trend retracement like that which occurred in January.

Aggressive traders would be entering short-sell/breakdown orders to profit from an expected price slide to the downside.  They would also locate their stops at various levels above $770, $790, and even $800.

This would be the correct or logical assumption given the facts as they developed on the Daily Chart timeframe.

However, this wasn’t the whole story, and those who viewed only the weekly chart had a completely different interpretation:

Pretend for a moment we didn’t see the Daily Chart above and we’re a swing or position trader who likes to buy pro-trend retracements to key support/inflection areas.

We would likely see the chart above as a grand buying opportunity, or at least a low-risk opportunity to play a possible inflection up off the rising 20 week EMA and prior high (polarity) with a target movement at least to the prior swing high near $840.  Logically, our stop-losses would be located under $765, $760, or lower.

Viewing the weekly chart, there is nothing at all (with the exception of the negative momentum divergence) that suggests a reversal or bearish expectation, at least while price remains above the critical $760 inflection level.

The main idea is that Daily Chart short-sellers would have benefited from the extra information – and opposite perspective – provided by the weekly chart.

It would change their set-up from automatically short-selling the valid Daily Chart breakdown instead to wait for a confirmation trigger – and thus breakdown signal – provided by the breakdown under $766 and $760 on the Weekly Chart.

Note the highlighted Green/Red box over the prices.  This is how I tend to view “IF/THEN” outcomes in terms of price movement off a key inflection level.

IF weekly buyers step-in to overcome daily sellers into the $766 inflection level, THEN price will rally higher potentially to target or exceed the prior swing high into $840 in a pro-trend impulse.

However, IF weekly buyers do not step in and instead selling pressure continues to break price under the $766 key support level, THEN we would expect daily chart sellers with weekly chart breakdown sellers to push price down toward the next inflection target into $715.

We don’t know the outcome of a given set-up, and we can only plan IF/THEN contingencies and manage positions that trigger as price moves toward a target level or away from an inflection level.

While we can stop the lesson here with the Daily/Weekly integration, savvy traders will take it one step further to view a frame LOWER than the Daily Chart for clues on the chart that are developing as price interacts with this critical support area.

Here’s the quick view of the 30-min intraday chart as Google closed into the $766 20 week EMA ‘make or break’ level on April 18:

I won’t comment too much on the lower frame chart other to say momentum revealed a positive divergence relative to the early April price low into $770 when compared to the ‘current’ push into the $766 critical inflection level (a bullish signal).

We also see a falling parallel trendline channel intersecting the $766 level as price trades into this inflection zone (this is also the entire “flag” trendline as seen on the weekly chart).

Once again, we don’t know if Google will hold and reverse here (a bullish trade if so) or else breakdown and continue the short-term downtrend (a united Daily and Weekly breakdown sell signal if so).

The key is seeing the importance of the potential inflection level on the weekly chart that can’t be seen on the daily or intraday charts.

By the way, here’s the outcome of this lesson and set-up:

Buyers stepped in at the $766 inflection level, turning the tide back to demand/bulls and the outcome was the pro-trend continuation set-up as seen on the Weekly Chart.

Perversely, those who viewed the Daily Chart and took the valid breakdown signal later contributed to the upward price action as they became buyers to cover their short positions, creating a temporary ‘feedback loop’ or small short-squeeze.

For trading triggers, aggressive traders can buy as price trades along the higher timeframe support level while conservative traders can “wait for additional proof” in the form of a breakthrough above the falling trendlines and/or falling daily EMAs, both of which occurred under $800 as highlighted.

For additional examples of this “Dual Timeframe Conflict” lesson, view my prior posts on the topic:

“IBM Quick Lesson in Multiple Timeframes, Divergences, and Earnings”

“Goldman Sachs (GS) Threatens Cradle Sell (but watch Weekly Chart)”

“Daily and Weekly Conflicting Opportunities in IBM.”

Updated Post on IBM Shows Why Multiple Timeframe Analysis is Critical.

The Weekly Bullish Signal in IBM overpowered the Daily Sell Signal in that example, similar to the one here in Google.

“Bullish or Bearish on RIMM?  Depends on Your Timeframe.”

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available

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A member asked me about the relatively low intraday TICK readings on Friday’s big breakout above 1,600 in the SP500 and 15,000 in the Dow Jones and wondered why the TICK did not spike well above 1,000 on the opening gap and intraday breakout higher.

For example, the NYSE Intraday TICK high on an ohtherwise bullish-dominant session was “only” 777.

Let’s address that reality with our current TICK Volatility Update chart for May.  This time let’s start with the Weekly Chart:

We’ll start with a description of each indicator on the chart above.

We see the Dow Jones Industrial Average (the chart is similar to the SP500 for comparison) along with the blue NYSE TICK indicator.

I’ve added a 20 week simple moving average (black) to the intraday TICK high and intraday TICK low as a way to smooth the data.

The “TICK Average” custom indicator is simply the addition of the 20 day average TICK high with the absolute value (because it is a negative number) with the average 20 day intraday TICK low.

The indicator mathematically summarizes what we can see for ourselves on the TICK and 20 day average indicator.

Perhaps what surprises me the most is that the TICK average indicator has consistently been registering new decade lows since the breakdown and compression in mid-2012.  Last week saw yet another new average TICK value not seen since early 2002.

In other words, as I continually stress to members and in open blog posts, “We MUST Consider Volatility When Trading with the TICK.”

Additional research can be found on the post “Research in Behavioral Changes in the TICK Over the Last 10 Years.”

Let’s now view a chart of the TICK itself for emphasis on the changes over the last decade (updated):

The chart above is simply the enlarged version of the TICK and 20 week simple average (intraday highs and lows) seen on the Dow Jones chart.

It makes it easier to compare periodic changes in terms of increases and decreases in intraday TICK highs and lows (“TICK Volatility”).

Our recent period of sustained decline in the NYSE TICK (highs and lows) began in mid-2011 (arguably early 2010) and we can see the visual compression that has taken place (note the blue lines with the actual TICK high/low data along with the black average).

For intraday traders, it’s important to note that a fixed TICK value like the popular 1,000 means different things during periods of high or low average volatility.

A 1,000 TICK reading is far less meaningful for signals/trade triggers in a period where the average intraday TICK high or low is above 1,200 when compared to the same 1,000 reading when the daily average value is near 800 in a low volatility environment.

Let’s finally update the current Daily TICK Average values so we can adapt our strategies:

In simple terms, the current 20 day average intraday NYSE TICK high is 874 while the average intraday TICK low is -817.

This means for intraday or swing traders who take the NYSE TICK into account when making trading decisions (such as short-selling/taking long profits at a +1,000 TICK reading or buying/covering short profits on a -1,000 TICK low reading), the updated values for importance should be near 875 (TICK high value) and -815 (TICK low value).

By the way, it should be inferred that periods of heightened intraday price volatility – and increased intraday TICK highs/lows – correspond with sell-offs or down movements in the equity markets while periods of low price volatility – and low intraday TICK high/lows – correspond with stable, rising up-swing periods.

Volatility itself is cyclical and spans between sustained periods of increasing and decreasing intraday range or price movement.

For prior updates and additional information on the “TICK Volatility” Concept, view any of the prior updates:

• February 2013:  “Monthly TICK Distribution Chart for January”
• January 2013:  “Intraday TICK High/Low Statistics from 2008 to 2013“
• January 2013:  “Updating TICK Volatility Charts to Start 2013“
• October 2012:  “Updating TICK Volatility for Intraday Traders“
• December 2011:  “Updating TICK Extremes for Trading Reference“
• Updating TICK Extremes for Intraday Traders (June 28, 2011)
• “Why You MUST Consider Volatility When Trading with the TICK”
• “Research in Behavioral Changes in the TICK Over the Last 10 Years”

Though I don’t discuss TICK Volatility in every member report, you could also follow along along each evening by joining our membership services for daily or weekly commentary, education, and timely analysis beyond the daily blog updates on these concepts.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s book The Complete Trading Course (Wiley Finance) is now available!

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The main chart-based theme is that the SP500 is trading into the “Will it or Won’t it Break” key level of 1,600, so let’s take a quick peek at Breadth Market Internals to get clues beyond what price is telling us.

First, the broader 30-min intraday picture:

I’ve highlighted three prior days where Market Internals (Breadth and Volume Difference of Breadth) clearly diverged with price.  You can see the outcome in each of these three recent events.

Typically, strength (or confirmation) in market internals tends to precede continuation or higher prices yet to come while weakness (new lows) in internals forecasts lower prices yet to come.

I’m keen to focus on divergences or non-confirmation signals to provide clues for potential short-term reversals or retracements that set-up two or more days worth of trading in a new short-term reversal direction.

For reference, the three prior divergence days occurred on April 11, April 18, and finally April 25.

We see a current divergence as we turn the corner into the new month of May 2013.

Here’s a ’step inside’ view of the current structure:

While price remains in a clear intraday uptrend, is it stalling or finding resistance just under the critical and obvious resistance target of 1,600.

Market Internals suggests caution or a potential short-term reversal may be more likely than an immediate breakout, but divergences DO NOT guarantee reversals.

For example, take the case of the clear divergence into April 25th.

With the first push into 1,590, price did trade lower in the morning session of April 26, falling points, but a mid-day “V-Spike Reversal” pattern resulted in a continuation of the prevailing trend.

In other words, the divergence was “good” only for a retracement, not a short-term or multi-day reversal event.

That’s what we’ll be watching currently with respect to the 10 point morning sell-off as we start May.

As we observe the market reaction to the upcoming Federal Reserve policy decision, keep focused on key short-term trendlines and the caution sign from market internals.

In the event price does swing to a new index high, be sure to update your chart of market internals and see whether they confirm the new high or else extend the current divergence pattern.

Follow along each evening by joining our membership services for daily or weekly commentary, education, and timely analysis beyond the daily blog commentaries

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available

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I wanted to highlight an interesting pattern that emerged from a quick comparison of the 2003 – 2007 Bull Market to the present Bull Market beginning in 2009 (and extending indefinitely at the moment).

Let’s see what possible price pathway may be in store if history is a guide, while being impressed at the similarities between the two structural bull markets.

First, the broader Monthly Chart comparison of both bull markets:

I color-coded key monthly swings for comparison purposes.

Note how the present bull market/uptrend has traveled more distance than the prior recovery (current bull:  927 points and counting when compared with the prior bull market 808 points traveled).

Both Bull Markets began with a sustained upward swing to ignite or “kick-off” the trend reversal.

While the 2003-2007 period had smaller monthly retracements, the present bull market had steeper but fewer retracements in the earlier phase of the recovery (new trend).

Toward the end (or at least the end of the 2007 period), both bull markets experienced large upward swings compared to more frequent small or shallow retracements.

It’s this “end of the 2007″ period that grabbed my interest, specifically with respect to the structure of the present rally.

Here’s a special Overlay Analysis chart of both bull markets on the same chart (but different scale):

I copied the 2003 to 2007 price movement and pasted it to the 2009 low to get a sense of the structural similarities – while the upper chart is scaled appropriately, the lower chart (the 2003 – 2007 period) is scaled starting with the 666 low.

Again, we see the strong “kick-off” or sustained upward reaction that began both trend reversals.

From there, we see a steeper 2010 correction than the 2004 period, though both markets continued their uptrends through 2011 (and 2005 respectively).

Again, we see the sharper pullbacks/corrections for the present bull market in comparison with the shallower periods from 2004 to 2005.

Toward the end of the 2006 period, the Bull Market continued with sustained upswings that lasted throughout 2007.

Our current Bull Market also developed strong sustained upward movement through 2012 and of course the present 2013.

While there’s absolutely no expectation that two bull markets will be identical, we can compare their larger similarities, particularly in terms of structure (sequence of highs and lows), distance of swing, and periods of uptrend continuation or counter-trend retracements.

If we look at the current message from 2007, we see a potential pathway for price according to a historical similarity or repeat phase.

I’m focusing my attention on the early 2007 retracement when compared to the late 2012 retracement period, both of which were followed by a sustained, week-over-week rally.

The comparable pro-trend swing from late 2007 rose 188 points while the current swing has traveled 244 points and climbing.

Once again, IF history provides any clue to a possible resolution currently, we see a sharp sell-swing occurring (it began July 2007) ahead of a final peak in October.

We always monitor these type of historical comparison analyses by assessing to what degree the current market “follows a similar structural pathway” as the past along with to what extent price deviates or ‘breaks’ the historically similar pathway.

For now, we will be monitoring for any type of sell-off, and if that does happen (instead of this upward swing continuing to extend well beyond 1,600), we’ll update the comparison to include a potential “rally to a new high” phase.

That’s about as far as we’d want to compare the price pathways for the moment.

Continue monitoring these uptrend structural similarities with respect to the analysis, key levels, and indicators you are using currently.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available

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