The Declining Moving Averages of Market Internals Nov 29

Nov 29, 2009: 7:21 PM CST

I wanted to share a special chart I created for this week’s Weekly Intermarket Report which takes a moving average of two different measures of Market Internals which shows a specific non-confirmation of recent highs.  Let’s take a look at these averages on the daily chart of the S&P 500 spanning back to the March lows.

What we are looking at is a 20 period moving average (High + Low + Close / 3) of “Breadth” (NYSE Advancers minus decliners) for the first line and UpVolume minus DownVolume (flowing into advancers and decliners) on the second line.

This is the same but updated chart as seen in my prior posts:

Market Internals Failing to Confirm New Highs

2008 – The Last Time We Saw Breadth Divergences Like This

A Different Look at Recent Breadth Divergences

The main idea is that the 20 period moving average reflects about one trading month and ‘smooths out’ the choppiness of pure internals.  It also helps us see the ‘trend’ a little better when comparing to price itself.

We do see divergences, both from the early April levels and the August spike after the failed Head and Shoulders.

The good news is that we’ve seen a ‘pick-up’ in the average in late November, but the bad news is that this ‘pick-up’ has taken us to ‘flat’ internals (near the zero level) as a difference between advancers and decliners.

The average is actually currently reading negative 9.

Does this mean the end of the world is upon us?

No – but it does mean buyers need to pay closer attention to this non-confirmation of market internals and price and be a bit more cautious instead of running in wildly here and chasing prices.

To keep a trend going, it’s generally accepted that we should see confirmation in market internals and volume – and we’re seeing neither of these.

Take it for what it’s worth, but it’s an encouraging sign for bears and a warning sign for bulls – but does not guarantee a trend reversal.

Corey Rosenbloom, CMT
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A Quick Look at the Major US Stock Indexes Nov 29

Nov 29, 2009: 2:45 PM CST

With the end of November just a day away, let’s take a quick look at the daily charts of the Dow Jones, NASDAQ, and S&P 500 US Stock Market indexes.

First, the Dow Jones Daily Index:

Quick observations:

Negative Volume and Momentum Divergences serving as non-confirmations of the recent 2009 price highs.

Watch 20d EMA at 10,200 for possible bounce, and if not, watch for a play back down to 10,000.   Any break of 10,000 would be very bearish and argue for further declines.

Next, the NASDAQ Composite Index:

Quick observations:

Similar negative volume and momentum divergences.

Price has already broken the rising 20 day EMA at 2,150, and price supported Friday off the 50d EMA at 2,040.  Watch this area for support, and any move beneath 2,100 would argue for a play back to 2,050 – and any move under this would argue for a deep retracement.

Finally, the S&P 500 Index:

Quick observations:

Price is 3 points under the rising 20 day EMA at 1,090, so watch for a possible play to 1,070 for potential support via the 50 day EMA.

Any move under the prior two price lows at 1,020 would argue for a deeper retracement.

Identical negative volume and momentum divergences/non-confirmations as the other indexes.

Combined Comments:

I’ve highlighted the “swing highs” or as I’m calling them to subscribers, the “Choppy-Toppy” periods which have been very difficult to trade weeks where the market has fallen sharply lower in one or two sessions, only to recover it all back in a series of non-stop up days.

If history is any guide, we’re toward the latter stages of a “Choppy-Toppy” identical swing as those I’ve highlighted – it’s almost eerie how price has repeated the exact same pattern.

Pay close attention to this pattern, as it paves the road ahead clearly if the pattern repeats.

The pattern would be broken (and thus market character changed) on any major surge up or collapse down in price.  Until one of those happens, it is reasonable to expect that “Past is Prologue” or that history should repeat with a quick down move into support and then a possible bounce higher.

For more detailed analysis – including discussions on the Monthly, Weekly, and Daily charts and opportunities for positioning in the stock market, gold, crude oil, 10-year Notes, and the US Dollar Index (and respective ETFs), please subscribe to my Weekly Intermarket Reports which takes a ‘larger perspective’ approach to current trading opportunities.

Corey Rosenbloom, CMT

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Gold’s Thanksgiving Crash and Friday Recovery

Nov 27, 2009: 11:14 AM CST

Along with the quick global market decline that occurred while the US was celebrating the Thanksgiving holiday, gold fell $60 into the night session, highlighting the potential risk of an overbought, overextended market.

As of Friday morning, gold has regained most of those gains, but the sudden volatility was not a fun experience for most participants.  Let’s see it on the overnight charts.

Gold (mini-gold shown here) closed on Wednesday near the $1,190 per ounce level – all time highs.

Just after midnight CST, gold began a slight decline which turned into an avalanche down to the $1,130 per ounce level but now is in the process of recovering most if not all of these losses going into the weekend.

The main educational point that comes to me is that there is risk in buying grossly overextended markets at their highs, unless doing so from a breakout pattern such as a break above a resistance level or triangle/rectangle pattern.

Many traders advise against “chasing” markets, and suggest that better opportunities exist on ‘pullbacks’ or retracements against a powerful up-trend.

Buying grossly overextended markets can be a game of “musical chairs” where the music will stop eventually – that’s guaranteed – but the point at which it stops is unknown (and thus risky).  Risk/reward relationships are difficult to assess, as are specific upside targets to play for along with logical levels to locate a stop-loss.

While it looks like gold traders will shake this one off if they somehow didn’t see or stress over this overnight plunge, nice rallies like this might not always follow sharp declines in prices – especially on such unexpected news as Dubai defaulting (honestly, who saw that coming?).

Be safe out there – markets seem to be very jumpy in all directions lately.

Corey Rosenbloom, CMT
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An Inside Look at the Thanksgiving Market Decline

Nov 26, 2009: 9:04 PM CST

If you didn’t check the US futures on Thanksgiving (what good trader wouldn’t do that?!), then you missed some sharp downside action, spurred by global shockwaves from Dubai’s proposal to postpone debt payments.  Global Markets were open while the US Market was closed, and many of these overseas markets fell sharply on the US’s Thanksgiving holiday.

Let’s take a look at the S&P E-mini futures contract on both the daily and 15-minute frame so we can see the fall-out that will face traders as the market opens Friday morning.

If this is any clue to Friday, the SPY and other major US Equity Indexes will open down around 1.5% to 2.%, testing near their rising 20 day EMA as shown on the @ES December Futures chart of the S&P 500 E-mini contract.

We see a similar negative volume divergence in the futures contract that we see occurring in both the SPY and the S&P 500 Index – that’s a bearish non-confirmation.

Let’s step inside this one-bar (one-day) decline that many traders are unaware has happened.

15-min ‘overnight’ chart:

I’ve drawn highlights to approximate the “day” session (what SPY and “Market Hours” traders would see without the overnight futures session added.

We see that the decline began just prior to midnight CST Thursday as the Thanksgiving holiday officially began… and the sell-off was relentless, with the exception of a mini-bear flag style rally around 5:00am CST.

It’s not a hideous “end of the world” sell-off by any means – we’re just back to the level seen on November 20th.  Still, a 27 point overnight drop in the @ES is no fun for bulls, given that each point in the futures contract translates into a $50 loss (or $50 profit for those short).  That’s almost a $1,500 loss overnight per contract.

For a bit of clarity – removing the overnight session – let’s look at the “NYSE Hours” 15-min chart:

Price has yet to overcome the 1,110 level in the futures contract, and now we’re trading back at the lower level of the trading range established at the recent swing highs.

We also see the negative volume divergence clearer on this type of chart – though keep in mind pre-holiday trading sessions are characterized by lower volume in general.

Here’s a great summary by Mish in his recent post, “Dubai Defaults – Deflation in Action – A Watched Pot (Never Boils) Theory“.

Read more about this development in Bloomberg and CNBC (or your favorite Financial Website) and be prepared for Friday’s half-day trading session.

Corey Rosenbloom, CMT
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SPY Three Push Negative Divergence Intraday Nov 25

Nov 25, 2009: 6:42 PM CST

I wanted to show the morning “External” or “Lengthy” (multi-swing) negative Momentum and TICK divergence that preceded a mid-day retracement which served as an excellent low risk, high probability short-sale opportunity.  Let’s see it on the 1-min SPY chart:

I’d mentioned to subscribers last night that there was an upward bias to Wednesday’s action based on the historical probabilities of an upward bias on the Wednesday prior to Thanksgiving, which tends to be a very low-volume day.

As price began rising off the open, forming higher swing highs and lows, there was a distinct non-confirmation forming on each new price peak in both the 3/10 Momentum Oscillator and – more importantly – the NYSE TICK.

The 3/10 Oscillator formed a long series of lower peaks and the TICK formed three “pushes” or three spike peaks in addition to a declining moving average (red) of the TICK.

To expect higher prices from a confirmation of the TICK (market internals) and price, we would want the absolute TICK value and also moving average of TICK to continue making higher highs along with price.

Anything less is a divergence, and a non-confirmation.

Non-confirmations never guarantee trend reversals, but they sure hint strongly at them – enough so to give short-term edges on the intraday frames.

Entry (short) signals often occur with trendline or moving average breaks (such as occurred at the $111.35 level at 11:00am CST) or – more aggressively – on reversal candles (such as dojis) at the upper Bollinger Band on the 5-min chart (which is not shown above but occurred).

Stops would be placed above the intraday high and retests of prior swing lows would be the minimum target, and a full trend reversal would be the maximum target.

Price only managed to retrace back to the prior 10:00am swing low before forming a positive Momentum Divergence (also at the 50% Fibonacci Retracement) and heading higher into the close.

Therefore, this serves as a great example of the Multi-Swing Divergence concept with an example of only a partial reversal (more commonly known as a retracement) instead of a full reversal – this is why you can’t throw your whole account into a single trade set-up, no matter how strong the probabilities may be.

I describe opportunities like this – in much more educational detail for references – in my “Idealized Trades” subscriber reports.  Subscribe now to get access to multiple educational examples of these specific trade set-ups and concepts that you can begin using on the next trading day.

The more times you see (and learn) these concepts and set-ups, the better you’ll be (and more confident!) in real time to enter these trades and manage them appropriately.

Unlock the mysteries of intraday trading!

Corey Rosenbloom, CMT
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