When Divergences Really Matter: SPX at 1300

Jan 28, 2011: 1:18 PM CST

I posted yesterday about the precarious internal situation regarding market internal and momentum divergences at the key major resistance level 1,300.

Today the divergences ultimately mattered and the market snapped-back like a rubber band early in the trading session, after slipping up into one of the most vicious bull traps in a while.

Let’s take a look at the mid-day update and see how yesterday’s divergences – and the tremendously weak new index high this morning – hinted at such a steep pullback at the key 1,300 level.

I’ll let the charts speak for themselves – they do better at revealing the set-up (multi-swing, crippling negative divergences) and today’s snap-back resolution.

The chart above shows the 3/10 Momentum Oscillator and the NYSE TICK along with the resolution of yesterday’s “Quick Check-up of Market Breadth and Intraday Trendlines.

Main idea – indexes/stocks NEED participation to continue safely higher as demand overtakes supply.  This reveals itself through confirming highs in internals, volume, and momentum.

After price rallies/swings higher, if divergences form in any of these measures, then it is a non-confirmation that usually is a safe, stable bet to take profits, as a retracement swing is likely.

However, lengthy, multi-swing, ‘massive’ divergences (these go beyond the 5-min charts) often precede reversals.

Here’s a look at the “Triple Threat” Internals I’m always watching:  Breadth, TICK, and VOLD

I didn’t annotate this chart so as to let you visualize the concept without lines and arrows – after all, when you look at a chart on your own, it doesn’t come pre-annotated.

Main idea:

On this morning’s SPX push to new recovery highs, the following market internals reported:

Breadth:  89 more stocks advancing than declining (down from the 1,500 level seen on Wednesday and the 500 level seen Thursday)

TICK:  422 stocks ‘ticking’ up vs those ‘ticking’ down at the moment the high was made – clearly down from prior sessions

VOLD:  44,148 more shares of “Up” Volume than “Down” Volume (linked to Breadth)

The market did not just gently retrace – it collapsed, as is the normal/expected resolution from an overextended market at key resistance with clear negative divergences across the board.

Now, that didn’t mean price HAD to collapse – a good trader would take this information and then be prepared to play “Popped Stops” (of the short-sellers) in the event buyers overcame demand and sustained the index higher – but that unexpected outcome did not happen… the expected one did.

While nothing is ever guaranteed to happen (unexpected good or bad news can always affect the best fundamental or technical analysis picture), generally the more ‘divergent’ the internals, the harsher/more violent the snap-back reversal/retracement will be.

The trendlines broke… and so did price.  Hard.

There’s also a lesson to learn in the Bull Trap… but that’s another story.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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3 Comments

3 Responses to “When Divergences Really Matter: SPX at 1300”

  1. Tweets that mention When Divergences Really Matter: SPX at 1300 | Afraid to Trade.com Blog -- Topsy.com Says:

    […] This post was mentioned on Twitter by Corey Rosenbloom , zortrades, facesincabs, mozartom, webIR and others. webIR said: RT: When Divergences Really Matter: SPX at 1300 http://bit.ly/fVAwQB via @afraidtotrade […]

  2. Michael Fts1 Says:

    I never could find a way to use divirgences. They appeared to be unstable often…

  3. Joshua Rosenberg Says:

    Good to talk with you Corey! I headed out after your talk — I'll contact you through your blog with questions in the future.