Yet Another Sleepy Divergence Forms in NYSE Market Internals

Mar 8, 2010: 5:47 PM CST

I’m never one to pass up mentioning a key negative divergence in price and market internals, and we had another one set-in on today’s market action.

Divergences aren’t perfect, so let’s look at the structure of the most recent development, this time using the NYSE Index itself to compare to its internals.

Usually, I show the S&P 500 in relation to market internals – and the picture is identical, only the S&P 500 is forming its divergence at the 1,140/1,145 level instead of the 7,300 NYSE Index level.

I prefer using NYSE Internals because they give a broader measure than the 500 stocks in the S&P 500… and most large media outlets quote the NYSE internals in their discussions.

Even though we made a marginal new high today in all indexes (the Russell and NASDAQ made new recovery highs), all new highs were met with a decline or a negative divergence in key market internals, as shown above.

I monitor the Breadth (NYSE Advancing stocks minus declining stocks), TICK, and Volume Difference (volume flowing into advancing stocks minus volume flowing into declining stocks).

Along with volume, these give a great view of the “insides” of the market and have an uncanny skill in hinting that reversals/retracements are ahead (meaning, take profits!).

The prior negative divergence (March 2 – 3) did very little downside action (highlighting that internals are not a crystal ball tot he future), but Thursday’s (March 4th) slight positive divergence did precede the nice rally on Friday.

Now we’re in a consolidation or ‘digestion’ mode to work-off some of those gains, and it might be a good time to take off profits if long and consider shorting any trendline breaks in the indexes or ETFs you trade in the event that this divergence does produce a market decline to test a prior support level.

If anything, it’s always important to monitor the signals from market internals, even in the face of this seemingly non-stop bullish move we’re seeing currently.

Corey Rosenbloom, CMT
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