First, the broader 30-min intraday picture:
I’ve highlighted three prior days where Market Internals (Breadth and Volume Difference of Breadth) clearly diverged with price. You can see the outcome in each of these three recent events.
Typically, strength (or confirmation) in market internals tends to precede continuation or higher prices yet to come while weakness (new lows) in internals forecasts lower prices yet to come.
I’m keen to focus on divergences or non-confirmation signals to provide clues for potential short-term reversals or retracements that set-up two or more days worth of trading in a new short-term reversal direction.
For reference, the three prior divergence days occurred on April 11, April 18, and finally April 25.
We see a current divergence as we turn the corner into the new month of May 2013.
Here’s a ’step inside’ view of the current structure:
While price remains in a clear intraday uptrend, is it stalling or finding resistance just under the critical and obvious resistance target of 1,600.
Market Internals suggests caution or a potential short-term reversal may be more likely than an immediate breakout, but divergences DO NOT guarantee reversals.
For example, take the case of the clear divergence into April 25th.
With the first push into 1,590, price did trade lower in the morning session of April 26, falling points, but a mid-day “V-Spike Reversal” pattern resulted in a continuation of the prevailing trend.
In other words, the divergence was “good” only for a retracement, not a short-term or multi-day reversal event.
That’s what we’ll be watching currently with respect to the 10 point morning sell-off as we start May.
As we observe the market reaction to the upcoming Federal Reserve policy decision, keep focused on key short-term trendlines and the caution sign from market internals.
In the event price does swing to a new index high, be sure to update your chart of market internals and see whether they confirm the new high or else extend the current divergence pattern.
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This article is brought to you courtesy of Corey Rosenbloom from Afraid to Trade.
Related: S&P 500 (INDEXSP:.INX), Dow Jones Industrial Average (INDEXDJX:.DJI).