Yet again, we’re seeing a situation where we have a multi-day decline in the three-key market internals when compared with the price of the S&P 500 or SPY ETF.
That sets up a major non-confirmation and increases that odds that we’ll see a price reversal/retracement to test lower levels, barring any unforeseen bullish news here.
We’re seeing the 5-min SPY (or SPX or @ES) chart when compared with Breadth, TICK, and Volume Differential.
For more information on these ‘internals,’ see prior posts:
“March 1 Mid-Day Check on Market Internals”
“Odds Favor Correction by Looking at Market Internals” (Feb 22)
In fact, we’re in the same boat as we were back when I wrote the February 22nd “Odds Favor Correction” post, so take a look at that and you can see the downside resolution that came next.
As a reminder, here’s what happened last time (an update from the Feb. 22 post):
Remember, divergences warn of likely reversals/retracements, but never guarantee them.
The situation is best to take profits if long, hold neutral if your are a risk-averse trader, or consider shorting to profit from any potential downside action if you are a more aggressive trader.
Notice the trendline violations I’ve drawn. While we could get a bounce or pop off the $112.00 level (looks that way) which is a ’round number’ support and prior swing low from yesterday, odds would shift dramatically to favor downside action if sellers took price under $112.00, so watch that level very closely.
Remember that divergences are like a rubber band that has been stretched, and sometimes when the rubber band - or a market - snaps back, the resolution can be violent, so be prepared in the event history repeats.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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