Using Market Internals To Become A Smarter Trader | Trading Tutorials

The market internals are going to allow you to look behind the scenes into whats actually happening across an entire market. These tools are going to give you a broader sense into wether or not a market is truly strong, or weak, and from there you can make more informed trading decisions.

Market Internals Overview

The three tools we use to gauge this strength are; volume ($VOLD), advance decline line ($ADD), and tick($TICK) reading. Now technically stock volume is going to be calculated by taking the difference in volume flowing into up stocks vs volume flowing into down stocks. This is measured based on the prior days close. The advance decline line will tell us more about how many stocks on the given market are actually moving higher vs lower based once again on yesterdays stock close price. And lastly the fastest market internal of them all is the tick, which measures the last printed price and the current trade price. It will determine if a stock is moving up or down regardless of where we are trading in relationship to the prior day close.

Market Breadth Indicator

By using these market internals we can now start to get a feel for what is normal and what is not. For example a breadth reading of 1:1 either positive or negative will tell us that there really is not enough volume flowing into the market to have a significant move in either direction. On these days we should look for and anticipate chop and responsive day trading off of key levels. If the breadth starts to pick up and read over 2:1 positive or negative then we can start to look for a trending day in which ever direction the breadth ratio is pointing. In general keep in mind that a negative breadth will usually be much more severe than a positive breadth. Look for -5:1 all the way up to -8:1 on a strong down day. Volume the ($VOLD reading) should also pick up right at the open on a trending day. When it is neutral and flat, volume will hover around the 0 line or not get much further than 2MM in either direction.

To download the breadth indicator click here: Breadth Bubbles.

The cumulative volume indicator helps smooth the weekly data into a compiled curve that speaks to inflows or outflows. In the NYSE, significant inflows or outflows will breach +/- 500MM. This should make sense as on any one given day 2MM marks significant, and if we can string multiple of those days together, we have a significant week.

Advance Decline Line

The advance decline line ($ADD) likes to hang out in specific regions. We can use trending zones in the + / – 1500 zones or look for a trending day in the market we are doing a technical analysis on. This would imply to us that the majority of the stocks on that exchange are all either positive or negative. If the $ADD is hanging out around the 0 line, we need to again expect some more responsive trade as the stocks on the exchange are now mixed and not giving as clear of a signal that the market its self should be trending.

$TICKs

Lastly the $TICK can be used to check out any emotional selling or buying when it reaches its extremes of + / – 800-1000. Whenever that happens you can generally take a fade or counter trend trade in the market as those levels of aggressive selling or buying of stocks are not usually sustainable. Keep in mind though that the trades need to be quick and responsible. This is not a trading strategy that is meant to be held all day. You can also look for divergences in the price action and where the $TICK lows or highs are going. If the tick does not make a lower low when the market does, theres a signal.

If you are interested in the Cumulative TICK indicator you can find it here: Cumulative TICK. This add on indicator is used to smooth the barcode nature of how the TICK prints. On trend type days the cumulative TICK will usually get to +/- 2000 by 12 o’clock and give you a confirmed confident read of +/- 4000 into the 4 o’clock close. A cumulative TICK that reverses from negative to positive or positive to negative speaks to a broad based market reversal that should be respected.