Study Lesson on Lengthy Market Internal Divergences and Snapbacks

Apr 7, 2014: 1:33 PM CST

Students of Market Internals know that Friday’s and Monday’s sharp downside reversal in the US Stock Market was a likely outcome from the message sent from market internals.

However, that’s not the complete picture, nor is it as simple as “Divergence Equals Reversal.”

First, take a moment to review my “Charting Market Internal Divergences at the Highs” post from last week which set the stage for the upcoming dramatic price reversal.

Here’s a broader picture update of the lengthy divergence and current situation for the “Big Three” Internals:

Market Internal Divergence 30 min SP500 S&P 500 TICK Breadth VOLD

First, let’s look at the upward advance from the March 27th low to the April 3rd peak (yes, note the April 3rd peak, NOT the April 4th peak).

Each day price crept to new highs, Market Internals registered lower highs.  In simpler terms, while the broader S&P 500 index (the way it is calculated) advanced in price terms, fewer stocks were advancing with the index (neither was volume or momentum).

Market Internals actually peaked on March 28th which is typical of a short-term market swing.  We tend to see the strongest (highest/peak) value in Market Internals at the start or “Kick-off” of a swing; as the swing progresses, we tend to see divergences develop.

Here’s a general principle to keep in mind – the longer the price swing and the more extended the divergences, the more powerful (or painful) the “snap-back” or reversal will be when price does give ground to reality.

It’s like a rubber band – the further you stretch it from the anchor point (which was near 1,850 in S&P 500 terms above), the resolution (snap-back) of the band will be more violent/rapid when it is let go.

It’s not much different with indexes and internals.

I mentioned the April 3rd peak and NOT the April 4th peak for a reason.  Price “gave it one more go” into all-time highs just shy of the 1,900 target but the result was a vicious, deceptive, misleading Bull Trap.

See plenty of posts in the archive discussing the concept of “Traps and How to Trade Them.”

This is one of the most frustrating concepts for new traders to grasp – we can easily see an overextended and divergent market but we can’t predict the exact reversal point.

In this example, price had one more “last gasp” or “dying breath” of upward price before the actual reversal in price.

Let’s see this scenario as depicted on lower frame charts:

Market Internal Divergence 30 min SP500 S&P 500 TICK Breadth VOLD

I highlighted each new price swing high with the corresponding value in Market Internals at the time (15-min chart).

Note the trendline break of April 3rd which was the actual “peak” of the market ahead of a “dead air” or “shock” trap that occurred on the gap-up Friday morning.

The picture is similar – and visually clearer – on the 5-min compressed chart (of Breadth):

Market Internal Divergence 30 min SP500 S&P 500 TICK Breadth VOLD

As price pushed to new highs with the “troops” or Market Internals falling back (declining/diverging), the risk increased for a retracement.

The longer the situation extended, the risk increased for a violent reaction which is indeed what occurred.

At this point, price collapsed straight back to the “anchor point” of the rubber-band analogy which is where the divergence began (March 28).

New traders should compare internals with price, and not be lulled into a false sense of security by a rising market and the pain of missing out.

All is well when internals rise (increase) with a rising market; all is not well when internals diverge with price.

The odds of a reversal increase as the price is extended in a divergent situation – the longer the divergence, the more rapid/violent the resolution.

The same logic is true with a market falling/declining yet internals are strengthening (forming a series of higher lows).

Continue studying this situation and the many similar examples so you can be prepared the next time this situation occurs (and it will).

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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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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John Carter Video and Webinar to Detail Trading Success from his Million Dollar Year

Apr 7, 2014: 12:49 PM CST

If you’re a fan of John Carter’s educational work with traders, you’re in for another special treat as he details lessons from 2013, a year in which he grew his account $1,000,000 richer.

He released a 5-min teaser video this morning and will be presenting his specific lessons learned from 2013 (and the “A-Ha” game-changer insights he is applying to 2014) in an upcoming webinar event for traders.

John Carter Lessons from a Million Dollar Trader

I’m a supportive affiliate of my colleague John Carter’s Simpler Options educational material and am also looking forward to hearing new lessons from his performance in 2013.

As discussed in the video, John will share with us what he learned from detailing his largest winning trades along with the largest losing trades from 2013 to isolate what the winners and losers had in common.

This is a practice all traders should do at the end of the year because it highlights commonalities of both trader performance and strategies that may have lost (or gained) favor.

While he introduces some of the concepts in today’s video, he will be delivering a free webinar detailing not only his insights but also the specific trade set-ups he now favors and what the winning trades had in common (you can use his insights into your own trading program).

To watch the video and attend the upcoming webinar (or see the archive), you need only provide your email address on the video page linked above.

Take a moment to watch the video and get ready for his upcoming webinar – and thanks as always to John for continuing to share his experience to the broader trading community.

Corey

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April 7 Collapsing Sector Breadth and Intraday Trending Stocks Scan

Apr 7, 2014: 12:18 PM CST

At the halfway point of an extended sell-off in the Stock Market, what message does our “Sector Breadth” chart send and which stocks may be intraday “trend day” trading candidates?

Here’s our April 7th sell-off intraday update:

Just like Friday’s “Market Collapse” update where Sector Breadth was clearly negative, today’s session shows similar “collapse” parameters.

First, almost all S&P 500 Consumer Discretionary ($XLY), Materials ($XLB), and Industrials ($XLI) stocks are positive mid-day.  Roughly 20% of Financial ($XLF) and Technology ($XLK) stocks are positive at this moment while 10% of Energy ($XLE) stocks are up.

Contrast this with 73% of Consumer Staples “Risk-Off” ($XLP) and 65% of Utilities ($XLU) stocks are positive at mid-day.

This would be a clear picture of “Risk-off” bearish/defensive money flow in a broader scope as money flows out of US Equities at the moment.

We’ll start first with four potential “trend day” sell-off stock candidates (and there are many):

Our scan includes the ADT Group (ADT), Lincoln National Corp (LNC), the CME Group (CME), and Time Warner Cable (TWX).

For those brave enough to fight money flow in the braoder market, here are potential uptrending “trend fighters”

Pepco Holdings (POM), Coca-Cola Co (KO), Health Care Reit (HCN), and HCP Inc (HCP).  With the exception of Coca-Cola, most traders probably have never heard of the other top uptrending candiates.

Interestingly enough, Pepco Holdings is a Utility Company while Health Care REIT (HCN) and HCP are both real estate investment trusts (REITs), both of which invest in health care real estate.

Continue monitoring the remainder of the session for any sign of reversal and barring that, continue shorting weak stock candidates.

Afraid to Trade Premium Content and Membership

Follow along with members of the Daily Commentary and Idealized Trades summaries for real-time updates and additional trade planning.

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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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April 4th Reversal Day Breadth and Trending Stocks

Apr 4, 2014: 12:34 PM CST

What a day this has been so far!  Let’s get right to our intraday Sector Breadth update and trend day trading candidates (hint – there’s far more bearish stocks trending down today than those trending up).

Here’s our SP500 Breadth Chart:

A quick glance shows a huge spike (bullish money flow) into “Risk-Off” or Defensive Utilities (along with some flow into Energy and Staples).

However, across the board, money is clearly flowing out of the Stock Market in today’s session.  Short-sellers may want to concentrate their attention on the weakest sector, Technology ($XLK) and perhaps Consumer Discretionary ($XLY).

Beyond the broader picture of Sector Strength/Weakness, here are our top uptrending candidates:

I would consider staying away from the long side as long as the broader US Equity Market trends lower.  There’s no point in trying to find the diamond in the rough (finding the few stocks fighting the trend) when the tide of money flow is so strong.

But if you must fight a trend, consider PG&E (PCG), Public Service Enterprises (PEG), AES Corp (AES) and perhaps Best Buy (BBY) which is a rare gem of consumer discretionary strength on a broad sell-off day.

Otherwise, here are our strongest downtrending candidates (and the scan revealed far more than four):

Kansas City Southern (KSU), Allegion (ALLE), Charles Schwab (SCHW – which is interesting), and Occidental Petroleum (OXY).

With a bull trap sprung, bears have their opportunity to wreck havoc today (and they already have).

Afraid to Trade Premium Content and Membership

Follow along with members of the Daily Commentary and Idealized Trades summaries for real-time updates and additional trade planning.

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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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Join Me Live Thursday for a Webinar on Overcoming Fear in Trading

Apr 2, 2014: 7:05 PM CST

I’m looking forward to a special webinar with Trader Kingdom that will take place Thursday, April 3rd at 4:30pm EST / 3:30pm CST and I hope you can join us!

Trader Kingdom Overcoming Fear Webinar

The webinar is entitled “Specific Strategies to Conquer Fear in your Trading” and here is the official description from the website (which includes free registration link):

Many traders often swing like a pendulum from greed and overconfidence to fear and hesitation depending on their experiences.

Join Corey Rosenbloom, CMT as he shares his experiences and discusses specific strategies designed to help you:

  • Build confidence
  • Overcome fear
  • Reduce doubt in your trading decisions

You will learn incremental steps you can apply now to combat normal fears and anxieties that occur as traders. The webinar will be particularly useful if you find yourself paralyzed by fears and unable to execute trades.

I hope you can join us live where you’ll be able to ask questions and participate with us!

Thanks to everyone at Trader Kingdom for making this event possible.

Corey

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