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Market Internals Checkup Ahead Of The Fed Day

 December 12, 2012 11:11 AM


As we prepare to react to Wednesday's Fed Day Announcement and Chairman Bernanke press conference, let's take a look at Tuesday's breakout, the prior compression in Market Internals, and what levels are important going forward.

We'll start with the 30-min intraday chart of the S&P 500 with Breadth (Advancers minus Decliners) and VOLD (Volume Difference of Breadth).

The big thing to note here is the visual compression – a triangle pattern – in both Breadth-based internals.

In general, compression phases in market internals tends to precede an immediate breakout and price expansion phase.  We'll be looking for any continued upside price action before and of course after the news-making announcements Wednesday.

[Related -These Small Caps Now Hold Deep Value]

Price gapped and held above the 1,420 short-term high and traveled all the way to the 1,430 prior resistance high before selling off into the close.

With this, we saw a visual upside break (confirmation) in Breadth but no visual breakthrough in VOLD (Volume Difference).

We generally have higher confidence in a successful price breakout if it is confirmed by a spike-up in internals (and volume).

Finally, observe the 30-min price-based trendline as the defining line of short-term support.  Buyers do no want to see the index under this important trendline (it could trigger short-sale intraday opportunities).

[Related -Russell 2000 Showing Relative Weakness at the New Highs]

We can see the picture and a clearer trendline on a lower frame intraday chart (5-min):

With the 5-min chart, we also add the TICK and see a similar compression though not as clear as the triangle in Breadth.

I also am highlighting the strong readings in VOLD which suggest broader based volume flow (bullish).

Strength in VOLD appeared as early as the December 5th price low which shows an important lesson in price and internal divergences.

I drew a shorter term trendline which connects Tuesday's low and this allows us to set up trade and position planning.

A breakdown under 1,425 would be a bearish trigger for a potential play toward 1,420.  Any continuation of selling pressure that breaks under 1,420 would be expected to bring in additional selling and could lock in a Bull Trap from those who bought in Tuesday's breakout.

However, the chart-based index resistance into 1,430 – Tuesday's high – will be the upside focal point to trigger a continuation of the short-term uptrend, especially if traders quickly react bullishly to the Federal Reserve events Wednesday.

Keep internals in mind along with these key short-term levels as the trading day unfolds on Wednesday.

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