While the S&P 500 Index has recently made new, all-time highs, a trio of indicators says we should be alert for market weakness.
One of our favorite sets of indicators is the PMO (Price Momentum Oscillator), ITBM (Intermediate-Term Breadth Momentum Oscillator) and the ITVM (Intermediate-Term Volume Momentum Oscillator). They allow us to quickly evaluate the internal health of price, breadth, and volume in the intermediate term.
On the chart below the first thing we can see is that there are negative divergences between the May market top versus the August top on all three indicators, meaning that the indicators did not confirm the most recent market top.
Next, all three indicators have crossed down through their 10-EMAs, indicating that weakness is persisting. And finally, the ITBM and ITVM have topped below their 10-EMAs, which is very negative.
One thing to remember with oscillators is that they have a finite range, and they are required to oscillate; whereas, movement of a price index is not restricted to a range and can often move somewhat independently of related indicators. Nevertheless, oscillators/indicators are useful in identifying overbought and oversold conditions, as well as potential internal weakness.
Price, breadth, and volume indicators have failed to confirm the recent price highs, and they are all reflecting persistent weakness. This is no guarantee that a correction will occur, but the internal conditions show that the market is very vulnerable.
Carl Swenlin | president and founder of DecisionPoint.com