What are market internals saying about the recent downswing in the market?

Let’s take a look – they’re strangely bullish so let’s see if we get a confirmation of this bullish whisper.

(Click for full-size image)

It’s helpful to interpret market internals across prior days rather than on a single day when trying to assess potential turns in the market.

In this example, we’re seeing the S&P 500 5-min chart of the last four days overlaid with the NYSE Internals:  Breadth, TICK (extremes), and VOLD (Volume Difference of Breadth).

Let’s start with August 12th:

Price gapped down to a new swing low, but ALL THREE market internals rose to higher levels than on the prior day.  Part of that is a factor of how severe (one-sided) the selling pressure was on August 11th, but it’s still a positive divergence.

Breadth actually increased steadily all day with new TICK high extremes coming in just before the close.

In a proof that market internals are not magic, the market did not rebound to the upside immediately on August 13th, but Breadth and VOLD rose for a second session in a row … with TICK forming extreme high divergences in a conflicting signal.

This morning, we have another sharp gap down that was quickly filled, with all three internals spiking to new highs again – look particularly close at Breadth and TICK (extreme) and compare their morning highs to prior price highs.

We have a case where internals are making new (swing) highs but price is not yet making a new high – that’s usually a bullish ‘whisper’ or hidden sign of strength.

But – internals again are not magical and price ultimately is king, so we need a confirmation via price to confirm that a bullish breakout is possible.

That confirmation – should it develop – will come with an upside price break through the upside trendline as drawn at the 1,085 level.  That’s the level short-term traders should be watching, given the hidden whispers of bullish potential strength coming from internals.

UPDATE:  2:00pm CST:

Today shows the importance of monitoring PRICE as the ultimate key – price rallied up to the declining trendline I mentioned earlier just shy of 1,085, paused, internals declined, and then price declined sharply after failing to break above trendline price resistance.

On the alternate view – any price continuation to the downside and breakdown again through the lower trendline at 1,078 and shattering of this morning’s swing low of 1,070 will invalidate the bullish whispers of strength from internals and suggest strong downside price continuation.

Watch these levels to see how price reacts with this bullish turn in market internals.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…

The US Dollar Index surged over 3% this week, which is actually a big move in the index.

It gives us a good lesson in how multi-timeframe confluence support can unite to form a powerful move and turn-about in price – as we can see in the weekly and daily charts.

Let’s start with the Weekly Chart:

I’ve been showing in my Weekly Intermarket Report the two confluence levels of support to watch, and what to expect at each.

First, we had a nice confluence of the 50w EMA and 50% Fibonacci retracement at the $81.50 level… and if the index failed to find support and bounce off $81.50, then the play was to expect a downward thrust to test the second and final price confluence at $80.

We ended last week right at the $80 level for a “Make or Break” support play, where a reversal or bounce up off this level was the expected play, but a downside break under $80 would be a game-changing bearish event.

Is it were, the Dollar Index not only bounced off confluence support at $80, but surged off of it.

The confluence comes specifically from the 200 week SMA at $80.14 and the 61.8% Fibonacci retracement as drawn at $79.86.  That converges about the $80 level.

Let’s now drop to the Daily Chart to see more evidence of confluence at the $80 level.

Going into the week, we had price testing the 200 day SMA – a very critical average – at the $80.50 level as well as “riding” (going down with) the Lower Bollinger Band.

More importantly, price retested the prior support area from the April and Feb-March price congestion/support area also at $80.

With all the price support, the daily chart – and especially the intraday charts – formed positive momentum divergences as shown in the 3/10 Momentum Oscillator and other momentum oscillators (Rate of Change, etc).

It’s often a good idea to take profits (if short) when price tests a confluence support area and forms lower timeframe positive divergences.

Traders can also find good opportunities to get long in such a structure when price breaks a falling trendline – such as what happened on Tuesday, August 10th on the break above $81.00.  That’s a more conservative “Prove it to me” entry.

An aggressive entry would be getting long as price tested the $80 price, which allowed a tight stop under $80 or $79.50 – depending on how much you wanted to risk.  When price tests a major confluence support area, you can often locate your stop closer than you would be able otherwise, which allows for explosive reward to risk ratios.

For now, keep focused on the $83 area which is confluence resistance – and a breakout above there would be a further confirmation that a likely reversal has taken place, instead of a one-week retracement.

The more you study these patterns/situations, the better prepared you’ll be to recognize and then trade them in real time as they develop.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…

With a lot of action happening very quickly on the stock market index daily charts, I thought it would be a good time to post an update on the chart structure and levels to watch – including Fibonacci Retracements – on the weekly S&P 500 and NASDAQ charts.

First, the S&P 500:

At first glance, the obvious level – to the downside – to watch is the 1,009 38.2% Fibonacci retracement which ‘just happens’ to be the 2010 price low.  A price slice under 1,010 – and then 1,000 – will most likely lead to a further price sell-off to retest the 950 or even 880 level as seen by the Fibonacci grid.

With that in mind, price has formed a double top recently in 2010 and also a price high in January at the 1,150 level – that would be your upside breakout level to watch.  An upside breakout above 1,150 sends the market likely higher to test the 1,220 level – but for now that is the lower probability outcome.

Traders are keen to point out the large-scale head and shoulders pattern stretching from August 2009 to present – and if the price neckline breaks at 1,000, the downside target would be a 200 point move lower to target the 800 level – or the 850 level if you drew the neckline at the 1,040 area instead of 1,100.

I’m also showing volume comparisons for July and August over the last three years – in 2008 volume steadily declined as price rose through July and then price stagnated in August and broke down in September.

In 2009 volume actually rose in July and flatlined in August as price ‘busted’ the failed head and shoulders short-term patternt to re-confirm the rally in place off the March low.

Volume steadily has been dropping after the May 6th ‘Flash Crash” – though the pattern is for volume to RISE when the market falls and DECLINE when the market rises – that’s bearish and akin to what we saw in 2008 prior to the end of the year sell-off.

Taking all that into consideration, let’s turn now to the NASDAQ:

We see almost an identical pattern – though the only differences are in price.

Overhead resistance in the NASDAQ to call for an upside break rests at the 2,350 level, and the level for the sharp sell-off breakdown exists at 2,050.

Between there, the market has stagnated and consolidated – which is where we are currently.

The same Head and Shoulders pattern is present, and a downside break under 2,100 gives a pattern price projection target of a 450 point move down to the 1,650 level – but there is a nice confluence at the 1,750 area coming in from a price swing low in July and the 61.8% Fibonacci retracement.  That would be a typical target on any big break of 2,100 and 2,000.

The pattern of volume is similar to the S&P 500, only NASDAQ volume fell during the July/August period last year while the S&P’s volume rose during the breakout.

We’re still seeing that bearish pattern of volume rising on sell-swings and falling on buy-swings.

While technically the market remains rangebound here, keep a close eye on any breakout from these price levels in the weeks or months ahead.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…

With the Federal Reserve announcing a policy to buy 2-year and 10-year Treasuries, naturally bond/note prices have been rising … some would say skyrocketing recently.

It’s not just the Fed – it’s investors spooked about the future of the stock market who are selling stock positions for the safety of bonds.

Let’s take a look at the two leading bond/note ETFs:  The 20+ Year TLT fund and the 7-10 year IEF.

First, the popular long-term TLT:

One thing to remember is that shorter-term maturities are moving higher more rapidly than the TLT – 20+ year fund – which actually is caught in a 4% trading range between $98.00 and $102.00 as seen above.

Bond funds are ’supposed’ to be stable, not volatile in either direction, but in the case of panics, these funds can move higher sharply as equities sell-off sharply.  That was the case during the end of 2008 and recently for May’s “Flash Crash.”

I’ve written on how key breakouts above resistance in TLT and IEF forecast something ‘big’ negative brewing in the equity markets, and two days after the breakout – the “Flash Crash” sent the Dow down 1,000 points.  Sometimes bonds have a lead over equities – and the relationship is generally inverse… what’s good for bonds may not necessarily be good for stocks.

See my prior update “If You Want Clues to Likely Stock Reversals?  Watch TLT and IEF.”

Where are we now?

Price has stagnated in a trading range on declining volume and momentum.  That doesn’t tell us a whole lot, but a breakout above $102 would likely continue to be bearish for the stock market just as a breakdown under $98.00 could be bullish for stocks.

Remember, bonds and stocks tend to compete for investor capital – and investors buy bonds via selling stocks in times of fear then sell bonds and buy stocks in times of ‘all clear.’

Watch these levels for clues – price caught in a range only tells us there’s a battle between buyers and sellers.

I think better insight may come this time from the IEF.

Next, the intermediate term IEF:

Surprisingly, the 10-year ETF has been rallying almost non-stop since the false breakdown (bear trap) in early April.  Even that was a warning sign.

Remember that stocks peaked in late April and bonds – at least the IEF – bottomed in EARLY April.  When bonds bottom and start to rise, that’s often a warning sign for trouble ahead for stocks.

Now that the 10-year Fund has broken to new lifetime highs – one can assume this is quite the bearish development for stocks.  Remember, 2-year yields recently hit lifetime lows under 0.5%.  That means big bond investors are willing to – basically – receive no return on their cash in their bond position for the exchange of the money being safe.

A return of 0.5% is far superior to a stock market decline of 10%, 20% or greater.

It’s definitely something to keep watch on.  Any sudden deterioration in these bond funds would be very bullish for stocks… just as further surging higher in price here would likely be bearish for stocks – in general terms.

For reference, if you want to view even shorter-term Treasury ETFs, try IEI for the 3-7 year Treasury Note or SHY, the 1-3 Year Fund.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…

I wanted to share another education resource document from Club EWI entitled:

“The Commodity Traders Classroom: A Collection of Commodity Trading Lessons”

The 32-page eBook by Jeffrey Kennedy is currently free to download for new and existing Club EWI members, as shown in the image below which also links to the “more information” page:

From the “more information” page, the eBook teaches:

• How to Make Yourself a Better Trader (Emotions and Controlling Them)
• How the Wave Principle Can Improve Your Trading
• When to Place a Trade: Jeffrey’s very own “Ready, Aim, Fire” approach
• How to Identify and Use Support and Resistance Levels
• How to Apply Fibonacci Math to Real-World Trading
• How to Integrate Technical Analysis into an Elliott Wave Forecast

All of the above bullet points are chapter titles with sub-headings such as “Fibonacci Retracements, Fibonacci Extensions, Fibonacci Circles, Fans, and Time.”  I personally found the Fibonacci section helpful.

Here’s a sample image I found interesting – how to draw a Fibonacci Arc/Circle:

Other sub-headings include, “How to Use Technical Indicators to Confirm Elliott Wave Forecasts” and “How Moving Averages can Alert You to Future Price Expansion.”

I’m an affiliate member of EWI and wanted to take the opportunity to share this free offer for you.  If you’re not already a member as well, they just want you to provide your email address to access this and other educational resources.

Though the book is geared towards commodity traders (gold, oil, wheat, etc), these principles and strategies are effective for all markets – this is similar to other educational booklets EWI has published, only it uses commodity charts for examples and includes some special information – regarding leverage, Wave counts, etc – for that’s slightly different than stock or ETF traders but all traders could benefit from this booklet.

Thank you to the EWI staff for these free little educational PDF booklets.

Corey Rosenbloom, CMT Continue Reading…