May 3 Check on Massively Divergent Market Internals

May 3, 2011: 10:51 AM CST

What are market internals – namely Breadth and VOLD – revealing about the current state of the market rally?

Let’s take a look, starting with the hourly chart:

As I highlighted in last night’s member report, the current rally structure and present divergence is similar in nature to that of the end-of-March rally into the 1,340 level.

Breadth – advancing issues minus declining issues – was strongest at the start of the rally (green highlight) and then steadily declined from the 2,000 level as price rallied higher.

The behavior in VOLD – volume difference of Breadth – was almost identical to Breadth.

The red highlight shows the end of the rally ahead of the breakdown phase in early April.  Keep in mind that the market did not reverse down on a dime, but paused for a week before falling from 1,340 to the 1,300 level.

For the moment, the expectation for the future resolution is similar to that of April – a retracement expectation unless proven otherwise with a firm breakdown under 1,300.

Let’s pull the perspective higher to see the daily chart of these important internals:

Looking at the daily chart above, you can see why I prefer assessing market internals and structure on the intraday charts (particularly the hourly and 30-min).

Nevertheless, you can see the steady progression of lower highs in Breadth and VOLD as the market continued its rally higher into April, which is the current case as we enter May.

Here’s the main idea:

Divergences are caution/warning (“take profits”) signals that need proof/confirmation via a price breakdown of a rising or horizontal trendline.

Internals give you clues – price gives the ultimate signal for the onset of a retracement phase in price yet to come.

Keep watching price along with internals very closely as more information (price data) evolves.

Corey Rosenbloom, CMT
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