The Good Signal from Market Internal Divergences into Resistance

Ever since observing positive momentum and internal divergences at the 1,260 level (200d SMA), the upside target for the S&P 500 has been a retest of the 1,300 level.

One could say the test happened today, and the current structure reveals now a negative internal (and momentum) divergence situation into this target resistance level, giving us a neat lesson in combining internals with key price levels and the trade opportunities that arise from them.

Let’s put this in simple terms as we look at the current S&P 500 and “Big Three” Market Internals:

As usual, we’re seeing the current S&P 500 along with the “Big Three” Market Internals – Breadth, TICK and Volume Difference (of Breadth) as seen in TradeStation.

Let’s start with a lesson –

It’s been well-documented that the S&P 500 had a critical price support target at 1,250 (March 2011 low) or the 200d SMA (1,260) with the recent low being ON the 200d SMA for support.

As price tested this higher structure, the intraday structural charts, as I’ve been showing to members in the Daily Reports, showed not only positive momentum and internal divergences, but a crystal clear “Rounded Reversal” pattern formation.

We had an inflection low (aggressive buy-in) at the 1,260 level with a conservative or “prove it to me” buy trigger signal coming on the breakthrough of the little resistance level at 1,280 which coincided with yesterday’s Trend Day move to the expected 1,300 target – tested today.

What now?

As price rallied up to the 1,300 key level, we saw internals were sharply declining, especially early in the session.  Momentum also declined/diverged into this level and a little “Three Push” reversal pattern also developed into the overhead level.

Does this all guarantee a reversal?  Certainly not – but so far, price is inflecting to the downside as a result of a failure to break above 1,300.

The negative divergences increased the odds of a failure to overcome this level, and we’re seeing the downward inflection develop.

I’m showing two trendlines that price broke on the sharp decline into today’s close (conservative entries), though aggressive traders could have certainty shorted INTO the 1,300 resistance with divergences (thus allowing a tighter stop but no guarantee 1,300 would hold as resistance).

Unless buyers can break the divergences and bearish turn in structure, we could see retests at least of 1,280 or lower.  Intraday traders were already in a position to benefit initially from the inflection (and trendline breaks) from the 1,300 level.

Take a moment to look over the lessons above from internals (and higher timeframe price levels) so you can better understand these opportunities and thus take good advantage of them the next time a similar situation develops.

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!