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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