A Checkup on Current Market Internals and Breadth at the Highs

Feb 9, 2011: 11:48 AM CST

I’m a big fan of using market internals as a source of “under the hood” confirmation/non-confirmation when charting new swing highs in the S&P 500 index.

Let’s take a look at the “Triple Threat” market internals and then take a longer-term perspective of breadth in the current market environment.

First, the “Three Main Internals” 5-min Chart:

What we’re seeing above is the classic Breadth ($ADD), TICK Extremes, and Volume Difference of Breadth as key market internals to compare to the recent price highs.

It may come as no surprise that as we look inside the new swing high, internals aren’t there to support it with bullish strength.  That warns us of a potential pullback, and we got an initial fall this morning just before noon EST.

The picture is looking similar, but not as severe, as the prior push up to the 1,300 level that resulted in a swift snap-back on Friday, January 28 and the similar picture Wednesday, January 18th.

In fact, let’s take a look at a broader picture of Breadth and see these examples:

This is the S&P 500 Index compared with Breadth – the number of advancing stocks minus declining stocks (on the session).

Divergences in internals often precede snap-backs or retracements in price – so the gameplan isn’t necessarily to rush in and short these, but to be cautious from a long/buy standpoint.

We’re seeing a similar pattern repetition that preceded the quick snap-backs from the 18th and 28th, but the trend wasn’t broken – it was only interrupted with a violent down-burst in price.

Be cautious, given that we’re divergent at the new highs, and given the past history, little pullbacks have been known to erupt at any moment – giving intraday traders an opportunity for fast-reflex profits… and swing traders a “take profits” exit signal just off the swing highs.

Continue monitoring price and internals in real time as new developments occur – in other words, don’t just rush out, put on a trade, and ignore new data.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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