I recently received an email from a student asking about a technical tool I use from time to time to judge strength in the broad markets. This is not a tool to replace my supply and demand analysis, but rather something that can be used to assist me in determining the strength of the trend and also whether a supply or demand zone is likely to hold or break.

As traders, we want to trade in the direction of the dominant trend. We need to be vigilant in seeking out signs that the current trend may be in trouble before it reverses. There are plenty of indicators that we discuss in the Professional Trader Course that teach you how to find the market weakness.

The broad market indexes, the Nifty and the Sensex, have a large influence on how our individual stocks toll move throughout the day or the week. The market indexes are calculated from the movement of the individual stocks that make up the index in a weighted manner. These stocks can act as a support or a weight. Think of the Nifty as a bridge. The stocks of the index are the supports that hold up the bridge. If the Nifty trend is moving to the upside, there should be many of the component stocks moving it up. If the Nifty continues to climb while many of the stocks fail to rise, then it is doing so without much support and is likely to reverse very soon.

The same happens when the markets are moving down. For the downtrend to continue there should be more stocks of the index pushing the Nifty down with their own downward movement. If it is only moving down with a few stocks, it is unlikely to continue the move. We can check this information on most trading platforms by looking at the Advance/Decline ratio. If the Nifty is rising but the number of stocks advancing is dropping, then the trend is in trouble and may pause soon or even reverse.

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Looking only at the advancing issues vs. the decliners may not be enough, as it doesn’t incorporate volume into the analysis. Even though an uptrend may seem in trouble, if there is higher volume in the bullish socks, it may be enough to push prices higher. We can turn to the Trader’s Index, also known as the TRIN to assess the advancing volume with declining volume.

India Markets

The TRIN is unusual in that it moves opposite to the Nifty. If the TRIN rises, it is because the selling volume is gaining over the buying volume. This is obviously bearish for the markets. However, extreme levels could also mark potential turning points. The TRIN is a ratio where 1.0 means selling and buying pressure are equal. If the TRIN drops below 1.0, there is more volume in the stocks that are advancing in the market. A rise in the selling volume sends the indicator above 1.0.

For the uptrend in the Nifty to continue, the TRIN should make lower lows and show that buying volume is increasing.

An additional trend health indication is the number of stocks in the index making new highs versus new lows. In a strong up-trending market, you should see that the net number of stocks making new highs minus stocks making new lows should be increasing. When that net number is dropping, there are more stocks making new lows and that is bearish.

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So trade the trend, but look for the signs that the trend is ending before you give up profits, or worse, turn them into losses.