How to read market internals

Why and What Are Market Internals?

We hear professional traders articulate that to consistently pull money out of the market, you need to trade against the masses and avoid herd mentality. he culprit usually is that many of the breakouts you buy into quickly reverse, and you watch as price action goes against the original position. That’s when the obvious reveals itself: Reading chart patterns and volume is not enough to give you a significant trading edge. Market internals are metrics provided for the NYSE/S&P/Nasdaq and show us statistics that relay what is going on in the market minute to minute. They can be used on all time frames, but are especially handy for all forms of short term trading. These internals are updated every few seconds.   They can also show you divergences, where the markets are making a new move but don’t have a ton of stocks participating in the move. They provide a near real time insight into the health and status of the markets and change along with conditions.

NYSE TICKS:

One of the most common of the market internals is the NYSE TICK($TICK) or TICK index. This tool compares the number of stocks on the New York Stock Exchange that are rising to the number of stocks that are falling. You take the upticking (or rising) stocks and subtract the downticking (or falling stocks). If the number is positive, that means more stocks are rising than falling. If the number is negative, that means more stocks are falling than rising.  In tick interpretations, consistent move above +750 can be bullish and consistent move below  -750 can be bearish. However, When the TICK approaches +1,000 or -1,000, these are extremes indicate a severely overbought or oversold condition. In either case, trader has to combine support resistance with tick indicator. On a day when we are stuck between +/- 400 that indicates a very slow range bound market! Understanding the TICK can help you decide when to buy or sell. Always use the TICK in connection with other factors to make your decision. However, as a quick read on market sentiment, the TICK is a valuable tool. We provide professional intraday analysis in our premium market internal twitter feed!

Advanced – Decline Line($ADVN $DECN)

Advance decline line indicator chart shows me how many names are moving higher and lower on the session on the NYSE .In Thinkorswim this can be looked at by using symbol $ADVN-$DECN. This value is shown on a price chart and is constantly updated throughout the day.  If we take a quick look at the intraday slope of the Advance – Decline line we  can get a better view of how strong buying/selling is. When this number is +/- 1000 that means the market is in a strong trend for the day. If that value is at -1500 that means there is strong selling across the board. If that value was only -500  then that tells me the market is lower but it’s been more of a range bound  market at that current moment.  I personally feel divergences in the A-D Line are much more useful than confirmations of an underlying trend. Image (internet)

 

 

NET NEW 52-WEEK HIGHS/LOWS:

Net new 52-week highs and lows is another very popular market breadth indicator to help determine the underlying strength in stocks. We can use the net 52-week high/low indicator for confirmation in what price is doing. On up days, we want to see more follow through in new highs, and during price pullbacks we want to see  there is no major drop new lows in stocks . If you see big pull backs in many stocks it means we are in a mini downtrend. Sometimes we can see mixed signals, in those scenarios look for divergence. When price is making higher highs and you’re not seeing it confirmed by expanding new highs (or worse, new lows) then it’s time to get suspicious about the rally.

 

PUT/CALL RATIO:

The put/call ratio is based on Chicago Board Options Exchange (CBOE) statistics. The ratio equals the total number of puts divided by the total number of calls traded. When more puts are traded than calls, the ratio will exceed 1.00. As an indicator, the put/call ratio is used to measure market sentiment. When the ratio gets too low, it indicates that call volume is high relative to put volume and the market may be overly bullish (see “Selling down,” below). When the ratio gets too high, it indicates that put volume is high relative to call volume and the market may be overly bearish. This indicator can be a little tougher to use because when the market is trending down, the ratio tends to fluctuate in the upper end of the scale between 0.85 and 3. In an uptrending market, the indicator will trade between 0.35 and 0.75. In a bearish market Put/call ratio can stay higher. You need to combine other indicators such as market trends with the ratios. However to the contrarian investor, the put call ratio can be used to determine when the investing crowd may be getting either too bullish or too bearish. A high put call ratio is a bullish sign as the it points to an over-bearish crowd – and vice versa.

McClellan Oscillator (NYMO/NAMO):

The McClellan Oscillator is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. It is primarily used for short and intermediate term trading.  The measurement is a bit complicated, and uses a ratio of the stocks advancing minus the stocks declining, and then uses two different weighted averages to arrive at the value. The NYMO and NAMO measure overbought and oversold conditions in the stock market. Readings of more than 60-80 indicate severe overbought conditions, and often precede large declines. Readings below -60-80 display extreme oversold conditions, and usually lead to strong bounces in stock prices. Extreme levels and divergences from price action give us an advantage in trading.


VIX As Market Volatility Gauge

VIX is the indicator that tells us about the fear factor in the market place. Market gets very volatile as VIX moves above 17. For example, when market is strong, VIX moves lower and vice versa. VIX provides us signals about market moves.

  • A VIX in the 11-13 range is an extreme on the downside, meaning there is very little fear in the market and as a result the options are very cheap. In this case, we will be buyers of options premium.
  • A VIX reading above 18-20 means there is fear in the stock markets. However , VIX above 24-25 range is an extreme on the upside.

Putting it all together:

With these indicators, you can stay ahead of the herd and capture quick sharp moves while the masses are still wondering what happened.  We focus on intraday charts. Trade only with the trend and learn how to read and range and break out zones to detect support and break out levels.  It’s important to understand the strengths and weaknesses of the tools we have at our disposal. These tools used together help me quickly take a look at the overall strength or weakness in the market. We provide professional intraday analysis on market internals and indexes in our premium market internal twitter feed! Our twitter feed on internals https://twitter.com/market_internal .

 

 

 

 

 

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