Stock Market Internals Begin to Weaken

| March 8, 2012

The S&P 500 index closed moderately higher today, rebounding further off of support at the lower boundary of the uptrend from October and approaching recent highs.

As we have noted often during the last several weeks, the rally is extremely overextended on a short-term basis and it will almost certainly be followed by a violent overbought correction. Breakdowns in price are often preceded by breakdowns in market internals such as volume and breadth. The following graphs display the long-term views of volume summation and breadth summation, both of which have been moving lower since peaking in February.

These retracements in volume and breadth are early signs of developing weakness in the rally from October. However, they do not suggest that a long-term reversal is imminent. Price will often continue to trend higher as internal indicators move lower, especially when a rally becomes highly speculative and market sentiment approaches bullish extremes. For example, notice how both indicators trended lower during the development of the topping formation in 2011. A long-term top is a process, not an event, and these downturns in volume and breadth suggest that the rally is losing internal strength. Market behavior during the next several weeks will provide the next signal with respect to long-term direction, so it will be important to monitor price and internals closely. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.

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Category: Commentary, Market Update

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