market internal basics
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Market Internal Basics and Broad Market Analysis
Tools, tactics, indicators that gauge
investors attitudes toward the
market Quantify the levels of optimism or
pessimism in various markets Market trends end and reversals
often occur at sentiment extreme
measures “Smart traders” trade in direction of
trend until it ends Then maneuvers towards the new direction
Novice & inexperienced traders
often fade trending markets trying
to countertrend trade Often abandon winning trades to early and
repeat the cycle over and over again
Two distinct categories of traders in
market place
Commercial / Institutions – Traders uses
futures as hedging instruments
Non-Commercial / Retail - Traders uses
futures for speculation and profit
generation
Reports are released on a regular basis
and information is readily available
online for current business atmosphere
and project trends
Economic/business fluctuations
Significant pre-market moves
GDP, CPI and other distinguish reports
can easily influence the markets
Most Popular sources for headlines Wall Street Journal
New York Times
Traders often search and scan for “strong commentary/language” Tops of the markets often associated with
▪ Surge
▪ Explode
Bottoms in the markets often associated with▪ Plummet
▪ Plunge
▪ Tank
Trend reversals (V tops & bottoms) often occur from underline
themes Reading between the lines
Now…the internet is the most popular source for news
Tick Indicator Defined Used to determine market strength and directional changes
Guidelines Look at # of stocks trading on an uptick vs. a downtick.
Used intraday to determine when the market may change
direction.
Lead to Broad market support and resistance.
For the general market, prior high and lows are points of support
and resistance.
Bullish notion = Trading ranges > 0 (more trading on upticks,
favors longs)
Bearish notion = Trading ranges < 0 (more trading on downticks,
favors shorts)
TRIN Indicator Defined Used to determine who is in control of the market
Guidelines (Advancing Issues/Declining Issues)/(Advancing Volume/Declining
Volume)
Indicate overall market bias
Bearish notion = Readings > 1 (more volume going into declining
issues)
Bullish notion = Readings < 1 (more volume into advancing issues)
Absolute value is important, but trend is more important
UP Trend is Bearish, DOWN Trend is Bullish
Extreme readings (> 1.5- or < .35) often leads to contrarian
indicators
NASDAQ Sectors Semiconductors Biotech
When aligned (either Bullish or Bearish) with Russell Futures, patterns are likely to follow through.
NYSE Sectors Banking Brokers Transports
When aligned (either Bullish or Bearish) with DOW and S&P 500 Futures, patterns are likely to follow through.
These are the primary sectors that are often used as filters than can indicate the patterns of the equity Futures are likely to
follow through.
Ideal trading situation
ENTRY
LONG Entry•Up trend•Higher Highs & Higher Lows
Price Action
4
4
4
4
4
4 Natural pullbacks
in price action
Ideal trading situation
ENTRYLONG Entry•Up trend•Higher Highs & Higher Lows
Price Action
4
4
4
4
4
4 Natural pullbacks
in price action
TRIN is suppose to measure volatility within the stock market.
The TRIN represents the relationship between advancing and declining issues
by measuring their volume flow.
The TRIN is commonly used as a short term trading tool.
The TRIN also has an inverse relationship with the Tick.
In contrast to the Tick, a rising TRIN signals that the Bears are
beginning to take control.
Likewise, a falling TRIN tells us that the Bulls are taking control
of the direction of the market because a falling TRIN shows us
that more volume is flowing into advancing stocks than
declining stocks.
2. Bullis
h R
ally
3. Sideways Topping Action
1. Sideways Bottoming Action
4. B
earish
Rally
1. Sideways Bottoming Action
Transition Among Phases
Indicator provides
signal
Buy ShortSOH SOH
FocusHere…
Ideal trading situation
ENTRYLONG Entry•Up trend•Higher Highs & Higher Lows
Price Action
Natural pullbacks
in price action
Ideal trading situation
ENTRYPrice Action - LONG Entry•Up trend•Higher Highs & Higher Lows
Price Action
+1
+1
+1
+1
+1
+1
Natural pullbacks
in price action
+1
-1
0
TRIN Indicato
r
Buy signal
Ideal trading situation
ENTRYPrice Action - LONG Entry•Up trend•Higher Highs & Higher Lows
Price Action
-1
-1
-1
-1
-1
-1
Natural pullbacks
in price action
+1
-1
0
TRIN Indicato
r
Buy signal
Helps us to determine whether volume is flowing into advancing
or declining issues.
The TRIN will read under 1.0 when advancing stocks are the
major source of volume and above 1.0 when declining stocks are
the predominant source of volume flow in the market.
A rising TRIN depicts a weak market and a falling TRIN depicts a
strong market.
What is important on this indicator is not only what the current
reading is, but the trend of the indicator.
Is it changing character, providing evidence of going from selling
to buying or vice versa.
Consider Up Trend Price Action
Look for Candlestick bullish patterns and setups
Reversal Bar – price action closes above the high of the previous bar
Count price action candlesticks – 3 or more consecutive down bars (lower highs
and higher lows)Candlestick
Reversal Setup
+1
-1
0
TRIN Indicato
r
- PLUS -
Buy signal
1
2 3
1
32
Use technical analysis for BUY
signals
Use technical analysis for for SHORT signals
Trading with the trending price action.
To identify when the markets are advancing and declining based
on price action and use market internals as “weight-of-
evidence”.
Understand that market internals often presents the markets as
lop-sided
Derivations of market internals can easily provide an inaccurate
picture of the broad markets
What if you could have a set of modified market internals
that made your interpretations easier….
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