Daily Market Internals Now Failing to Confirm Rally from March Lows
Let’s take a look at the full S&P 500 rally from the March 2009 lows and take a special look at daily readings of Breadth and Comparative Volume to see that Internals surged higher and confirmed the initial rally but lately in an ‘about-face,’ have been failing to confirm the new 2009 price highs. Let’s take an objective look at price and underlying internals.
Click for full-size image.
The two lower panel indicators are as follows:
Panel 1: $ADD – The Advance – Decline Difference (subtracting the daily NYSE Advancing stocks from declining stocks)
We can watch the “Breadth” or Advance/Decline line intraday, or we can monitor it like this, looking at the values on a closing basis for the day. For example, a value of 2,000 means 2,000 MORE stocks advanced on the session than declined.
This is classic “breadth” which shows the relationship of stocks that are positive on a particular day vs those that are negative. Higher values – of course – are indicative of a strong rally.
Panel 2: $VOLD- The Up-Volume minus Down-Volume (comparing VOLUME of advancing stocks to VOLUME of declining stocks)
Not only are we interested in “Breadth,” but we also want to know the “Volume” of the breadth, which generally go hand-in-hand in terms of confirming market rallies. This is truly looking ‘under the market’s hood’ for insights on depth of participation or activity.
Insights
As the market rallied strongly off the March 2009 lows, we saw sustained and high values both in the Breadth and Volume readings, though both formed slight negative divergences as price moved into the contraction/consolidation (correction) phase of June to July.
This was the infamous “failed Head and Shoulders” pattern.
Upon the July lows and ‘breaking’ to new highs from a sideways correction, we again saw new price highs confirmed with spikes in both Breadth and Volume differences – exactly what you’d expect to see if forecasting a continuation of the up-trend rally.
Pull the perspective back and look at the larger picture of the entirety of the rally so far.
We see strong internal readings at the start and the lengthy declining red arrow – or declining highs in both Breadth and Volume – as price has continued to claw its way to new highs into October.
If we look at the current highs, we see that Breadth averaged around a positive 1,500 difference, which when we compare it to the start of the rally, we see the difference averaged over 2,000.
This lengthy negative divergence is also present in the daily volume ‘breadth’ difference.
Finally, on the most recent pullback or retracement, we are seeing the largest concentration of red bars – or negative differentials – of the whole rally, with each new day making new relative (but not absolute) lows.
Conclusion
Negative ‘internal’ divergences with price over such a lengthy time period and a lengthy rally do not spell positive news for buyers/bulls. If anything, it appears to confirm what others are saying that the “market is running on fumes.”
It’s one thing to look at price and another to look ‘under’ price at the internals.
Higher/supportive internals are indicitive of continuation of a trend, particularly in the early stages.
Divergences and antagonistic/non-confirming internals… are indicative of a price reversal brewing.
Continue watching this with caution – for the uptrend to continue, we need to see internals improve.
Otherwise, prepare for a correction or falling prices ahead as the internals ‘catch up’ with price- like a rot within an otherwise strong-looking tree.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
Thanks. I am hoping this is another trend day.
Certainly looks like one so far! Would stay/continue shorting as long as price is under 5-min EMA and TICK/Breadth continue to confirm the negative posture.
I think I'm finally getting it thanks to your Idealized Trades! It's just the beginning of the day that I'm never sure of.
Thanks Terry!
I spent the last two reports focusing on teaching Trend Day trading techniques – I'm glad to hear it's paying off!
It usually takes about an hour or so to conclude odds favor a trend day – need to know at least the first hour's structure. But by the 2nd or 3rd hour – the structure is usually clear which allows aggressive trading for as long as internals and price confirm.
So if not confirmed, what does one do in the meantime? I wanted to get in, but was “afraid to trade” : at the beginning. Finally guessed it was a down day.
In theory, price could have supported off the $105.75 support area which defined the lower boundary of the descending triangle. The EMA structure turned negative at 10:40 EST.
I think trend days are confirmed by watching price itself (lower lows and lower highs), EMA structure (20 under 50 EMA, and that price is beneath them both) and watching for new TICK and momentum lows. Also watch for higher volume relative to prior days.
There's no magic formula – just assess structure and probabilities and know the 'warning signs' and watch closely until enough data falls into place to favor a 'positive feedback' (new shorts entering + long/buyers getting stopped out) environment.
Then monitor everything throughout the day to ensure the structure and 'positive feedback' continues.
Thanks for the article Corey! IMHO If you don't know which way the market is going to go for a swing trade, you have to day trade. Enter at the open, exit at the close. Today you would buy a bear etf. Hey I love the 2x HOD.to but I'm going to park my money for the weekend and start all over again on Monday. If I see a good swing trade setup in the coming days, then I'll shoot for a swing trade. Hey, you have to admit that this action in the last week is pretty good for all traders.
Have a great weekend Corey!
Cheers,
Dan
Thanks so much, Corey.
VIX has broken through the 200ema That's got to be exciting for the bulls. But, I bet you they get pounded by a short covering rally on Monday as we're right on edge of the bband.
Sorry, I meant to say “That's got to be exciting for the BEARS”
Finally made a well-executed day trade thanks to you, Corey! Next time I'll buy more shares.
Congratulations terlyn! It's the world's best horse track, isn't it? You got to love it!
Thanks, DAN. The amount of time I spend studying, you'd think I'd be making buckets of money. I'm a cautious trader, to say the least. I hope it pays off.
Your welcome terlyn. There's nothing wrong with being cautious. Keeping losses small is the key. I've traded 13 winners and 13 losers this month, BUT my accounts are up significantly because all the losses are small and all the winners are big.'
Take care and I wish you all the best,
Dan
Corey, one of the interesting relationships in this market recently is a change from “weak bears” to “weak bulls” – it seems like the traders with less conviction are the ones who set their stops closest to the most recent support/resistance, where as your longer term value investors and fund managers are the ones who are stepping in to control the market are not so weak, they are playing for the longer term. It seem like this relationship of which side of the market is showing more weakness are the longs at this point, with very tight stops causing some quick covering whenever they are popped –
I'm curious have you looked at this relationship between longer/shorter term traders and how they affect the market?
Corey, one of the interesting relationships in this market recently is a change from “weak bears” to “weak bulls” – it seems like the traders with less conviction are the ones who set their stops closest to the most recent support/resistance, where as your longer term value investors and fund managers are the ones who are stepping in to control the market are not so weak, they are playing for the longer term. It seem like this relationship of which side of the market is showing more weakness are the longs at this point, with very tight stops causing some quick covering whenever they are popped –
I'm curious have you looked at this relationship between longer/shorter term traders and how they affect the market?