Watch for Bearish Divergence as Dow, S&P 500 Make New Highs - TheStreet

NEW YORK (TheStreet) -- Chartists who do their homework will keep track of the market's internals. By internals I mean what is happening beneath the surface.

How many stocks are advancing and how many are declining each day? How many stocks are making new 52-week highs or lows? How many stocks are trading above their 50-day or 200-day moving averages? All of these metrics, and others, are ways to judge the health of an advance.

High priced stocks and highly capitalized stocks influence the senior averages (DJIA and S&P 500), but an advance or decline or breadth line includes all stocks regardless of capitalization. Often near the end of a bull market one can see the large well-known stocks continue to rise while smaller names fall by the wayside. At a market top, technicians are on alert for a bearish divergence when the movement of the averages is not matched by the cumulative advance-decline line.

Image placeholder title

As of Friday's close, the DJIA was only 527 points from a new all-time high. See chart above.

Image placeholder title

As of Friday's close, the S&P 500 was only 46 points from a new high, chart above.

Image placeholder title

This is a cumulative Advance-Decline (AD) line, above, for the stocks on the New York Stock Exchange, and not just 30 stocks or 500 stocks. This chart shows that the AD line has peaked, breaking two uptrend lines with a weakening momentum picture (lower panel). It is possible that in the next few weeks that the major averages make new price highs while the AD line does not. This bearish divergence is likely to be a wake-up call to cull out weaker stocks in your portfolio and get more defensive by year-end.

Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of Jim Cramer, TheStreet or any of its contributors.