End of October Market Internals in a Persistent Trend

We often look to Market Internals for guidance, but what happens when the power (money flow) of a trend overrules the signals from Market Internals?

Let’s look at the month of October 2013 for our answer and get a check-up on what’s happening currently in the “Big Three” Market Internals.

In general, we use Market Internals to serve two purposes:

Confirmation or Strength Suggests Trend Continuity (examples:  October 10, 17, and 22)

Non-Confirmation or Divergence/Weakness Suggests Retracement or Possible Reversal (October 9, 15, 18, and 28).

It would be ideal if every divergence resulted in a retracement or every “spike” in internals preceded a strong trending move but we know as traders that nothing is perfect for ‘predicting’ the future.

At the moment, the persistence of the uptrend or “creeper” bullish impulse in motion has overruled signals from divergences two times since the October 9th low and indeed we may be seeing our third “failed divergence into breakout” outcome.

The Divergence of October 14 (see prior update) resulted in a one-day stable retracement ahead of a new breakout in price and internals (October 16).

The similar yet smaller negative divergence of October 18th simply preceded a flat or sideways session the next day ahead of yet another price and internal breakout.

We’re monitoring today’s price action for a third upside breakout event despite divergent internals.

The picture is clearer on a S&P 500 specific (and 15-min) Price/Internal Chart:

In the chart above, I’m highlighting the Price/Internal Breakouts (green arrows) instead of the negative divergences.

I also wanted to showcase the symmetrical triangle price pattern that developed ahead of this morning’s internal breakout (and upside price gap).

Note that each successive new impulse or breakout in internals has occurred at a lower level which suggests a wider or lengthy negative divergence, but for the moment price continues to impulse higher in a “clearly creeping” environment.

Uptrends are propelled in part by new buyers stepping into the market (or adding to existing positions, especially on breakouts) along with “old” (pre-established) short-sellers buying-back positions when their stop-losses are triggered.

Positive Feedback Loops (where present higher prices trigger future higher prices) tend to continue longer than many traders expect and in the process, they tend to overrule divergences in the process.

Continue monitoring price in the context of the current feedback loop and Market Internal perspective.

I’ll be discussing breakout, retracement, and reversal trading tactics (including breakouts) along with a newly added presentation on the “Popped Stops Play” (applicable to failed divergences and persistent trends like this) live at the Las Vegas Traders Expo on November 22 – join me and your fellow traders at the free expo!

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s book The Complete Trading Course (Wiley Finance) is available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).