Stock market internals strength waning as resistance tested: Charts review

Happy first trading week of 2012! But get extra cautious because negative divergence has increased, so our Year 2012 Overview thesis of a decline into the middle of this month is looking more ripe now. Many equity indices and stocks saw their high on Monday and struggled with up and down swings the rest of the week. Behind the scene, we see deterioration in strength of market internals data. We won't know until February whether the stock market can ascend to higher highs in early March. First we have to brace for a decline that has the potential to retest the November lows around 1170's $SPX. We'll look at various charts of this, as well as a couple of my sentiment charts ($VIX).

First, the McClellan Oscillator which tracks the internal strength of the stock market basically dropped through the week; and its level remains well below that of October-November. In the lower indicator window, the McClellan Summation Index is testing its 50-day moving average, indicating that the longer-term outlook may be in doubt as well.

It's also noteworthy that Tom McClellan and his team are showing negative divergence in the McClellan Price Oscillator for the Dow Jones Industrial Index, their "Chart in Focus" this weekend at McClellan Financial, http://www.mcoscillator.com/learning_center/weekly_chart/.

Last weekend the McClellan folks showed negative divergence involving copper prices. Today, I looked at the Baltic Dry Index and see something equally concerning. This $BDI index of shipping rates fell sharply in recent days:

Resistance is illustrated in several charts. I'll start with charts showing how many of index stocks are above their key moving averages. The number of Nasdaq stocks above their 50-day moving average is itself testing up to its own 50-day moving average. And the number of New York Stock Exchange (NYSE or $NYA) stock above their 200-day moving average is testing up to its own 200-day moving average!

In both cycles theories, and good old-fashioned Dow Theory, the fact that not all indices made highs above last year's October-November highs remains a potentially bearish sign. Also, the Dow Industrials are tickling up to an upper price channel. As for the monthly - I've got an old chart with a bearish downtrend fork, and price remains confined within it. Testing it, even - so we'll see!

Finally, the volatility index while declining is both stretched, and nearing potential support. Sure, down is down until it isn't, but the $VIX remains well above the 2011 lows. It's below the October-November lows which looks bullish, but being so far above the early 2011 lows isn't so bullish necessarily. The $VIX is also nearing potential trendline support levels on my daily and weekly charts. These trendlines are a little roughly drawn but you get the idea:

Based on the VIX's overstretched condition, once it rises over the prior day high it can be a stock-index sell signal that lasts longer than the last one. And all in all with the negative divergences and price resistance shown above, the upcoming dip may be a significant one. We'll want to buy that dip when it completes, but we don't want to lose money on long positions while the dip takes shape.