Trader Warns “The Rally Is Crumbling Below The Surface”

Authored by Sven Henrich via NorthmanTrader.com,

The rally is crumbling underneath while the bid remains persistent and dips are shallow to non existent. I recently already talked about problems sighted with this rally, but want to highlight another notable aggressive divergence that is taking place underneath markets, a trend visibly similar to the lead up to the 2018 highs.

The specific index I want to highlight is the $NYSE which reached a key technical pivot this week, its previously unfilled open gap from January 2018:

What is the $NYSE? It’s a broad index covering over 2,000 stocks. It’s a significant index, but unlike $DJIA, $NDX and $SPX it has not made new highs yet in 2019 joining the crowd of other lagging indices not having made news, notably small caps, transports and the banking sector $BKX.

By filling its open gap from 2018 $NYSE has reached an important technical pivot, hence the initial rejection from the open gap fill is not a surprise. Does it mean it can’t reach new highs? No, it can, but as with any rally one must keep a close eye on the relative strength of a rally and the path of this rally heading toward gap fill has been crumbling beneath, specifically: New highs vs new lows.

While new highs vs new lows tend to ebb and flow along with price during this recent rally new highs vs new lows have been falling dramatically to the way side, similar to the lead-up to the September 2018 highs:

Complete non confirmation of the move.

What’s that mean? Nothing for now, but it is a very stern warning that says, unless this divergence repairs itself soon and dramatically, this divergence is signaling that this rally or future rallies are selling opportunities.

Indeed in 2018 $NYSE made a new high in August 2018 with new highs vs new lows already diverging negatively. The subsequent new highs in September 2018 showed a further deterioration of new highs vs new lows. And then the bottom fell out.

So be aware, this lack of confirmation in new highs vs new lows may be a leading indicator suggestive that this rally is built on a crumbling road beneath. As in 2018 this does not preclude marginal new highs to come, but without confirming strength in new highs vs new lows this rally may be in major trouble.

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