A Different Way to Look at Breadth Divergences in Trading

11/26/2009 12:02 am EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Instead of looking at absolute breadth (advancers minus decliners) data, let’s smooth out that data with moving averages and take a look at the “bigger picture” of recent breadth developments.

Click to Enlarge

The main idea of this chart is that I’m showing symbol $NYAD, which is the NYSE Advance-Decline Line (or “breadth”), but I have turned that off (invisible) because it is so choppy.

The blue and red indicator you are seeing on the main chart is the 20-period exponential moving average of breadth (or of the $NYAD hidden chart), which serves as a “smoothing” mechanism.  It’s shown on an area chart, which is visually appealing. It’s really just a moving average of breadth.

Underneath the area chart, I’m showing the S&P 500, with particular information given to the three most recent swing highs in price up to the 1,100 level.

As you may already know—or can see in the chart above—these price highs are being met on deteriorating breadth (internal) conditions, which generally serves as a non-confirmation of price.

This is just another way to look at that. In seeing the smoothed average of breadth forming lower indicator highs each time, the S&P 500 has crept its way to a fresh new 2009 high.

Moving away from this smoothed breadth chart, let’s look at the current market internals chart of the S&P 500 in TradeStation:

Click to Enlarge

While the $ADD is holding roughly similar daily highs near 2,000 (meaning 2,000 more shares closed higher on the day than those that closed lower), the volume differential ($VOLD) is showing a negative divergence into recent price highs.

I’m also showing prior times the $VOLD indicator diverged with price just before a short-term pullback.

So far, I’m interpreting today’s rally as being the same type of rally that occurred on September 28 and October 22, which were strong up days that merely interrupted the downswing in action.

Any move to new highs would invalidate that thought process and argue for a more sustained rally, particularly as short sellers’ stop losses are triggered (I call this “popped stops”).

As usual, let’s watch these developments very closely!

By Corey Rosenbloom of AfraidToTrade.com

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