Let’s step inside the recent retracement rally and view the current state of the three key “Market Internals” and what clues those internals are revealing.
SP500 Market Internal Glance:
(Click on image for full-size view)
Before looking at the current state of the Internals, let’s take a moment to see why watching internals with price is helpful.
The top panel - $ADD - is the “Breadth” or Advancers minus Decliners.
The middle panel is the old-fashioned NYSE TICK.
Finally, the lower panel is the VOLD - Volume Difference (volume of advancing stocks minus volume of declining stocks).
Many times, a divergence with price and market internals will forecast a reversal swing, as seen two times on the chart above on February 2nd and February 5th.
The February 2nd rally back to 1,100 ended on a Negative Divergence.
The February 5th decline under 1,050 ended on a Positive Divergence.
What’s happening now?
We’re in a consolidation/correction/rally phase with a slight negative divergence forming in internals, though that’s not quite locked into place because price has not yet - as of noon EST Thursday - formed a new rally high above 1,080.
Thus we can’t yet technically call it a ‘divergence,’ but we are not seeing ‘hidden strength’ in the internals either.
The main idea going forward is that we would need to be bullish if internals broke the swing highs I have labeled with a vertical line, which include:
1,992 more stocks advancing than declining in Breadth
677,000 more shares in Up Volume than Down Volume in VOLD
Until then, market internals are giving us a muted, cautious stance as price struggles to test the 1,080 level.
Corey Rosenbloom, CMT
Afraid to Trade
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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