Recent Market Internal Weakness and Snap Declines

Feb 22, 2011: 12:18 PM CST

I’m a big fan of monitoring price swings with market internals, such as TICK, Breadth, and Volume Difference, as these can give you early warning signs of a potential short-term turn in price.

That was the case two times in the short-term frame – so let’s turn now to our updated SP500 and Market Internal chart:

What we’re seeing above is the classic NYSE TICK and NYSE Breadth – my two favorite market internals.

Let’s start with Valentine’s Day February 14th.

TICK Peaked on the 11th at the 1,200 level as price “kicked-off” to a new and confirmed rally/breakout.  Breadth pushed up to the plus 1,000 area and all was well as price rallied short-term higher.

Then, we got the Valentine’s Day rally but it was met with clear negative divergences in both TICK (successive highs) and Breadth.

Tuesday gave us a trendline break and lower prices … but not for long.

Wednesday gave us a surge in both price and Breadth… but not so much TICK.

The price continued up until the holiday weekend when a caution signal formed on the charts in the form of dual divergences and a price trendline break.

Can charts Friday predict that Libya’s protests would result in a down market today?  No – unexpected news is always a factor in trading, but in this case, the chart gave a clean caution or warning signal to be defensive or flat ahead of the weekend.

How?

Mid-day Friday the 18th, price rallied to new recovery highs but did so on very weak Breadth (around 500 as you can see) and a flatlined TICK stuck around the 700 level.

Those are certainly not the picture of perfect bullish strength in the short-term.

Divergences are one thing but trendline breaks are another – traders react to them either by stopping out or by putting on new positions, making breakthroughs of obvious trendlines something you should factor into your trading decisions.

As I post, we’re testing a horizontal trendline at the 1,325 level so watch what happens there carefully.  It would be bad for bulls if price shatters this level and continues lower.

Take time to learn how to use market internals as confirmation/non-confirmation signals as you set-up your trades and gameplan – there’s several examples if you do a search for “market internals” here on the blog.

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!

1 Comment

One Response to “Recent Market Internal Weakness and Snap Declines”

  1. Stock Market Trading System Says:

    Markets are always fluctuating. Investors need to be always on the verge.