Recently, the latter was the method the market has decided to use for signaling it has reached an intermediate top and it is preparing to change direction. Here is a chart showing how the divergence occurred, notice the new 52 week closing high for the DJIA, SP500, Nasdaq 100 and the Russell 2000 did not occur on the same date.
Furthermore, the SP500, Nasdaq 100 and Russell 2000 have peaked before the DJIA reach its peak on 9/20/2012. This indicates the DJIA made a new non-confirmed 52 week closing high on 9/20/2012.
The Nasdaq advance/decline line and the daily net new high-new low indicator have also peaked on 9/14/201, days before the Nasdaq 100 index closed with a new 52 week high on 9/19/2012. By not having the market breadth indicators to confirm the new closing high is a sign an internal top has been made. Here is the chart of the Nasdaq 100 and its breadth indicators:
Similarly for the DJIA, the New York Stock Exchange advance/decline line and the daily net new high-new low indicator peaked on 9/14/2012 and the DJIA made another new 52 week closing high on 9/20/2012.
Notice how small the difference between the 9/14/2012 closing high and the 9/20/2012 closing high, it is only 3.56 points (13593.37 vs 13596.93)..subtle!
Although the market gave off various divergence and non-confirmation signals, it does not necessary mean an immediate beginning of a new bear market or a big sell off. But it does signal a major correction could be in the offing, and one should be very cautious on initiating new long positions and be very defensive on existing long positions. After the market has reached an internal top, a sudden change in direction can happen when it is least expected. Therefore, trade cautiously and defensively until the market establishes a new trend.
