Market Internals Deteriorate Well in Advance of Dec 31 Selloff

Dec 31, 2009: 6:43 PM CST

Key Market Internal signals flashed negative divergences and non-confirmations of recent S&P 500 and SPY 2009 price highs, setting up the high probability for a reversal to the downside.

I wanted to highlight a chart I’ve been showing to members of the daily Idealized Trades Reports since Wednesday evening – we’re now seeing the downward action forecast by the plunge in Market Internals.  Let’s take a look at the updated chart.

(Click for full-size image)

The chart is understandably overwhelming at first – let’s take it level by level.

Using TradeStation, I’ve created a chart of the SPY (which could easily be the S&P 500 Index instead of the ETF) showing the 20 and 50 period EMA on the 20-minute chart (which, also, could just as easily be a 30 min or 15 min chart – we’re more interested in comparing price swing highs to internals/indicator swing highs to see if they are in alignment… they’re not).

In the first panel under price, we see the Breadth (NYSE Advancers minus Decliners) on the day as a number (line) tabulated for each 20-minute period.

The line peaked on December 21st, suggesting internal strength and higher prices yet to come.  The line retested the highs (1,500 net advancing stocks) a second time on December 23 and 24th, but then began a steady and obvious decline from there.

On each graph, I’m using the “new high or low for the day” dot indicator – red for new intraday low and green for new intraday high.  This helps me see readings quicker without having to squint.

Breadth made a new swing low under 1,000 on Wednesday, forecasting lower index prices ahead.

The second panel shows the TICK, which is shown as a bar graph instead of a clean line graph.  It’s not as easy to read, but the intraday high levels of the TICK began to form lower successive peaks as time progressed.

Finally, the third panel shows the $VOLD or “Volume Difference,” which refers to the VOLUME flowing into advancing stocks on the day minus the volume flowing into declining stocks on the day (similar to the TRIN in a way).

I’ve been showing in the intraday reports how the $VOLD indicator has given ‘heads up’ on certain days, as on December 28th.

The $VOLD also peaked on the open of December 21st (like Breadth) which forecast higher index prices yet to come in a classic internal “sign of strength.”

However, as price rallied from that point, the $VOLD formed lower highs and lower lows all the way to today, when price literally fell off the mountain with 30 minutes left to trade in 2009.

I had previously been highlighting the potential for a “Rounded Reversal” structure to form at the highs – it appears the pattern is completing now.

A few years ago, I used to give very little attention to key market internals – now I place them in the forefront of making most trading decisions when it comes to market structure and potential pathways ahead.

Take the time and energy to get acquainted with market internals if you haven’t done so already.

Oh, and have a Happy New Year everyone!

Corey Rosenbloom
Afraid to

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Comparing the US Dollar and SP500 Relationship Since 2007 Peak

Dec 30, 2009: 2:50 PM CST

In continuing the thought from yesterday’s post “A Look at the Dual Rallies in the US Dollar Index and S&P 500,” I wanted to show a longer-term perspective of the two markets, starting with the S&P 500’s October 2007 peak.  This will give us more ground to cover in assessing the inverse correlation between the Dollar and the S&P 500.

(Click for full-size image)

It’s not a ‘given’ that these markets are automatically inverse.  In fact, after the October 2007 stock market peak, the US Dollar and the S&P 500 fell together until the Dollar Index bottomed (two horizontal lines) in April and July 2008.

At this point, the inverse relationship became locked in place again, especially as the stock market entered its free-fall in September and October 2008 – that was when the global ‘panic’ began (commodities also fell) and the only market that managed to hold up was the Dollar Index… and that was in relative performance to a basket of other overseas currencies.

Depending on how you view it, the actual Dollar Index made a slight new high as the Stock Market bottomed in March 2009, but in the continuous futures contract (due to roll-over), we see a slightly lower high.

From this point on, the S&P 500 rallied sharply while the Dollar plunged back to test the lows seen in mid-2008.

The Dollar is now rallying with stocks currently holding their own for the time being.

When looking at correlations between markets, realize that market relationships shift as different events occur, so it isn’t as practical to make a long-term correlation.

Many inter-market analysts feel rolling correlations are preferred, which means you take a variety of ‘measures’ to assess correlation, such as looking at one month, six month, one year, two year, etc to determine how strong a correlation holds up over different time periods, instead of taking a single measure and calling that your official correlation.

You don’t want to get caught leaning or diversifying the wrong way when correlations shift, and it’s possible we might be seeing at least a short-term shift right now.

Corey Rosenbloom
Afraid to

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A Look at the Two Dual Rallies in the SP500 and US Dollar Index in 2009

Dec 29, 2009: 2:36 PM CST

With many eyes focusing on the dual (and puzzling) rally in both the US Dollar Index and the S&P 500, I thought it would be good to go back starting with the March 2009 lows and see how many times this has happened recently – it turns out that there have been two times that the S&P 500 and US Dollar Index rallied simultaneously.  Let’s see them.

(Click for full-size image)

Starting with the March 2009 lows (to keep the chart readable), we notice that the dollar rallied into a bear flag-style pattern which I discussed in prior posts:

April 24, 2009: Bear Flag Breakdown for the US Dollar Index

May 7, 2009: US Dollar Index Continues its Slide from Bear Flag

May 26, 2009: US Dollar Completes Bear Flag as Expected

As the Dollar Index formed a bear flag rally, the S&P 500 also rallied.  Early April was really the only time that the US Dollar Index and the S&P 500 rose together for any meaningful period.

I’ve highlighted the three times that the Dollar Index formed any sort of upward counter-trend rally and compared it to what the S&P 500 was doing at the time – which was either pausing or declining slightly.

That brings us to the present, when the US Dollar Index (finally) is rallying off lengthy positive momentum divergences… but so is the S&P 500.

Not only is the S&P 500 not pausing or retracing downward, it is actually creeping its way higher along with new swing highs in the Dollar Index.

Market moves can be ‘fishy’ on the low volume and participation across the board that takes place in December, so it will take a few weeks into January to see how this ‘strange bedfellows’ relationship will play out when volume/participation increase in early 2010.

For now, keep watching closely and be ready to shift if a sudden move begins in either of these markets.

Corey Rosenbloom
Afraid to

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SPY Gap Repetition Breeds Familiarity

Dec 29, 2009: 12:11 PM CST

… and “Familiarity Breeds Contempt.”  Let’s take a quick pure price look at the recent five overnight gaps in the SPY – S&P 500 during the oozing uptrend that is taking place in the holiday bullish seasonality in the US Equity Markets.

I often use pure price charts to discover any specific repetitive pattern in price action that I might otherwise miss when looking at a chart with lots of indicators.

In this way, you can discover the ‘character’ or behavior of a market.

Starting with December 21st (not shown on left), price has gapped higher six days in a row.

With the exception of December 21st and December 24th (the day before the Christmas holiday – which is seasonally very bullish), price has suddenly fallen lower after the gap and filled the gap (falling just shy of a full fill on the 22nd) almost as quickly as it formed.

To me, this is evidence of “popped stops,” which occurs when a key resistance level is broken and short-sellers push the market higher.  Were this true bullish aggressive buying, we would see no gap fills.

Volume is also declining during this price rally.  That’s not the sign of bullish strength either.

However, none of that matters as long as price continues to rise, and the pattern – almost like clockwork – has repeated for 5 of the last 6 trading days (which would be 5 of 5 if we exclude the December 24th half-day).

The second part of the pattern is the afternoon ‘ooze’ or upward creep into the close.  It’s almost like a two-step dance the market is weaving.

Step 1:  Gap up in the morning.  Immediately fall after the gap.
Step 2:  Creep Upwards all day into the close.

That’s not to say that the pattern will repeat forever – it clearly will not – but as long as the pattern does repeat, it has provided a roadmap and trade-able edge to those who have perceived it – to those who have stepped back and observed the character and repetitive pattern in price.

Indicators have their place – but it is equally if not more important to look directly at price, observe repeating patterns, and trade those with the expectation that the pattern might repeat, even if it is in conflict with our favorite indicators.

And, if anything, we can file this under “very interesting.”

Corey Rosenbloom, CMT
Afraid to

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Intraday SPY Fibonacci Projection and Retracement Example Dec 28

Dec 28, 2009: 6:34 PM CST

I know – the title sounds… less than fun… but for those of you interested in learning intraday Fibonacci methods, today gave a great example of both the Retracement and Projection concept, and I wanted to share that lesson with you.

Let’s take a look at the SPY intraday chart (5-min) for December 28th:

If you feel overwhelmed, let’s take it one step at a time.

Starting with the intraday high near $113.00, we begin both grids.  We’ll start with the simpler to explain – the Retracement Grid in blue.

Starting with the $113.00 high and drawing down to the $112.60 low – which was also yesterday’s closing price – we draw a standard Fibonacci Retracement grid using your software (this is TradeStation).

The grid connecting the high and low reveals the 38.2%, 50.0%, and 61.8% retracements to watch for any reversal signals (such as doji candles) as price tests (touches) any of these retracement levels.

We see price forming three doji candles at 10:45 CST at the $112.74 level – the 38.2% Fibonacci Retracment.  Traders who were long could have sold, taking profits at this level.  Other, more aggressive traders might have decided to short at this level.

Price retraced one more time around 12:30pm and formed two similar upper shadow candles, which represent price rejection at a known or expected resistance level – the 38.2% level.

Ultimately, the afternoon price highs – including the close – were contained under the $112.74 level.

With that explained, let’s move to the more complicated Price Projection Tool.

As soon as price starts to form what looks like a Bear Flag, and when price breaks under the lower trendline of what you believe is a Bear Flag, you can break out your Fibonacci Extension (or Projection) tool to determine the 100% target – or full measured move – of that potential Bear Flag.

You need a “pole,” and then a “flag” in order to use the Projection Tool, and you won’t use it until price breaks under the lower trendline.

To use the Projection/Extension tool, start with the same high, then draw to the same low.  However, instead of stopping there (like you did with the Retracement tool), click one more time at the high of the flag – or at the upper price point near the upper trendline… in this case at the $112.75 level at 12:30 CST.

This causes your software to “project” a measured move of your “pole” starting with the high of the flag.

Generally, you are looking for the 100% projection, which – in this case – was $112.34.

This is both a target to play for by short-selling as price moves towards it, and also a spot to consider ‘flipping’ and reversing, trading long if you see reversal candles at the projection target.

I explain this concept more in my educational “Fibonacci” section, and particularly the page:

“Fibonacci Price Projections”

For specific information on Bull or Bear Flag targets, see my blog post:

“How to Project the Measured Move of a Bull Flag”

I explained this concept in today’s “Idealized Trades” report, which highlights educational example and teaches through daily repetition and lessons of these concepts and strategies as seen on the intraday timeframes.

Become a member today to gain access to all current and archived daily reports so you can see all the examples of these concepts on intraday charts, and thus be able to apply these lessons in real-time when these patterns form on the stock, ETF, or futures contract you are trading.

Corey Rosenbloom, CMT

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