Daily Market Internals Now Failing To Confirm Rally From March Lows

Let’s take a look at the full S&P 500 rally from the March 2009 lows and take a special look at daily readings of Breadth and Comparative Volume to see that Internals surged higher and confirmed the initial rally but lately in an ‘about-face,’ have been failing to confirm the new 2009 price highs.  Let’s take an objective look at price and underlying internals.

Click for full-size image.

The two lower panel indicators are as follows:

Panel 1:  $ADD - The Advance - Decline Difference (subtracting the daily NYSE Advancing stocks from declining stocks)

We can watch the “Breadth” or Advance/Decline line intraday, or we can monitor it like this, looking at the values on a closing basis for the day.  For example, a value of 2,000 means 2,000 MORE stocks advanced on the session than declined.

This is classic “breadth” which shows the relationship of stocks that are positive on a particular day vs those that are negative.  Higher values - of course - are indicative of a strong rally.

Panel 2:  $VOLD- The Up-Volume minus Down-Volume (comparing VOLUME of advancing stocks to VOLUME of declining stocks)

Not only are we interested in “Breadth,” but we also want to know the “Volume” of the breadth, which generally go hand-in-hand in terms of confirming market rallies.  This is truly looking ‘under the market’s hood’ for insights on depth of participation or activity.

Insights

As the market rallied strongly off the March 2009 lows, we saw sustained and high values both in the Breadth and Volume readings, though both formed slight negative divergences as price moved into the contraction/consolidation (correction) phase of June to July.

This was the infamous “failed Head and Shoulders” pattern.

Upon the July lows and ‘breaking’ to new highs from a sideways correction, we again saw new price highs confirmed with spikes in both Breadth and Volume differences - exactly what you’d expect to see if forecasting a continuation of the up-trend rally.

Pull the perspective back and look at the larger picture of the entirety of the rally so far.

We see strong internal readings at the start and the lengthy declining red arrow - or declining highs in both Breadth and Volume - as price has continued to claw its way to new highs into October.

If we look at the current highs, we see that Breadth averaged around a positive 1,500 difference, which when we compare it to the start of the rally, we see the difference averaged over 2,000.

This lengthy negative divergence is also present in the daily volume ‘breadth’ difference.

Finally, on the most recent pullback or retracement, we are seeing the largest concentration of red bars - or negative differentials - of the whole rally, with each new day making new relative (but not absolute) lows.

Conclusion

Negative ‘internal’ divergences with price over such a lengthy time period and a lengthy rally do not spell positive news for buyers/bulls.  If anything, it appears to confirm what others are saying that the “market is running on fumes.”

It’s one thing to look at price and another to look ‘under’ price at the internals.

Higher/supportive internals are indicitive of continuation of a trend, particularly in the early stages.

Divergences and antagonistic/non-confirming internals… are indicative of a price reversal brewing.

Continue watching this with caution - for the uptrend to continue, we need to see internals improve.

Otherwise, prepare for a correction or falling prices ahead as the internals ‘catch up’ with price- like a rot within an otherwise strong-looking tree.

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