Market Internals 2013-09-22

Monthly update on market internals.

The current snapshot of S&P 500 3-Day Advance Issues, Tick16 Short Term + Long Term as of 2013 September 22 close.

Reading

1. Long Term Tick16 (yellow line) tagging neutral zone from below

2. Short Term Tick16 (red line) back up at overbought zone forming two divergence tops against S&P new high. One spans 10 days and the other spans 3 days.

3. 3-Day Advance issues (green line) dropped down to neutral zone after divergence top against S&P new high

Inference

a. #1 is neutral

b. #2 points to short term top in the making

c. #3 a short term top will be in place if 3-Day Advance can go negative. A bounce off neutral zone can be a very powerful buy signal so there will be a big fight to control the outcome

Review

Inference from last update worked out well:

– S&P formed short term bottom right at the beginning of the following week

– rally from the short term bottom did not make it to 50% as it dropped lower first

The long term outlook mentioned that where S&P will be heading depends on the 3-Day Advance formation. By end of August / early September we’ve got the divergence bottom in place resulting in one strong rally.

Long Term Outlook

The other long term breadth data I have also points to major divergence against this S&P new high. Historically there are 2 ways to resolve such divergence. First is a quick deep sell off of 10% or more. Second is a 5% sideway move with extreme volatility.

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