What are Market Internals revealing about the current position of the S&P 500?

Let's take a look at the current structure and make note of prior reversals via Market Internal Divergences:

Click on image to enlarge!

Let’s take the somewhat busy chart step-by-step for clarification. What we’re seeing is the 15-min S&P 500 Index with two different Market Internal gauges:

• $ADD = NYSE Breadth (the number of advancing issues on the session minus declining issues)
• $VOLD: NYSE Volume Difference (Volume flowing into advancers minus volume flowing into decliners)

While these essentially measure the same thing – internal breadth or depth of participation of issues – it’s helpful to separate the two. In the chart above, we can see Market Internal Divergences with the Index – these frequently occur at short-term turning points in the market. It’s still better to wait for a trendline breakthrough – after a divergence – before positioning yourself for a reversal.

With the reference chart above, let’s now turn to the current 5-min structure to see the divergence and outcome:

Click on image to enlarge!

First, we had a clear negative internal divergence on the open of Thursday, September 8th into the 1,200 area. The outcome was a breakdown of the rising trendline as drawn, which set-up a nice trade to play for lower prices on the breakdown from the divergence.

Price traded to the 1,140 level and formed another lengthy/clear positive internal divergence, which resulted yesterday in a trendline breakthrough and subsequent reversal (trade) higher that took us back into the 1,180 level – no divergence exists at the moment.

For a bit of extra reference, take a look at my market update yesterday which showed the S&P 500 trading into a critically important rising ‘flag’ trendline of support. LESSON: When you can spot a positive market internal divergence intraday in conjunction with a test of a critical support area on the daily chart, it often sets up good trades to play for higher probability short-term reversals (like this).

What now?

We’ve already seen a good move up after the positive divergence and breakthrough from yesterday’s session, as price traded into a minor overhead intraday resistance level at 1,180. Further price strength/buying above 1,180 would be expected to carry higher to the 1,200 resistance cluster.

Otherwise, watch the market carefully as it trades currently under the little resistance area at 1,180 with respect to the 1,160 support.

Use the charts above as great references for the “Market Internal Divergence” concept of short-term reversal plays.

For more daily updates from Corey, visit his blog at Afraid to Trade.com