Study The Charts!
I have learnt a great deal from Dr Brett on reading the market pulse and the above idea is one of them. Before I proceed further, I wish him speedy recovery. Dr Brett is down with acute appendicitis and his daily insightful posts will be missed by all.
The blue line represents SPY, the pink line is the number of stocks making 20 day High less number of stocks making 20 day Low. I started tracking this in June, however I have a few earlier data points missing for the pink line, just ignore them.
Two points of observation from this chart:
1) During the sell-off earlier this month, we see a higher low (dotted yellow line) registered in both blue and pink line, thus confirming that a bottom has been reached.
2) We started to see divergence on 19 Jun, where the SPY continued heading up, but clearly, the momentum is lacking as reflected by the pink line. In fact, the momentum starting waning on 18 Jun.
Today's market tumbled, which is not surprising, given the above momentum waning and the indices unable to close above their previous high.
Study the charts! Here's a few places to study them:
-Bonus Education Charts from Corey
-More charts of interest from optionaddict
-HeadlineCharts shares his take on market momentum, breadth and volume