Market Internals – The Pulse of the Markets

When you visit a doctor for an ailment, they check out some basic things such as your blood pressure and your temperature. These are core signals to tell if something is wrong with your body’s normal function. As a trader or investor, we can also check the temperature and “blood” pressure of the markets. The tools to do so are called market internals.

The major market indexes, the Dow Jones Industrial Average (Dow), the NASDAQ 100 and the S&P 500 index, have a large influence on how our individual stocks will 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 Dow as a bridge. The stocks of the index are the supports that hold up the bridge. If the Dow trend is moving to the upside there should be many of the component stocks moving it up. If the Dow 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 Dow down with their own downward movement. If it is only moving down with a few stocks, it is unlikely to continue the move. So, we can look to see how many stocks are advancing (rising in price) versus declining (dropping in price) and judge the health of a trend. If the Dow is rising but the number of stocks advancing is dropping, or vice versa, then the trend is in trouble and may pause soon or even reverse.

In the above chart from Briefing.com, you can see that the morning drop was assisted by a large number of decliners. However, as the Dow bottomed out around noon, the number of decliners reduced and instead the increasing number of advancers lifted the index. Even after price dropped from a supply zone in the afternoon, the shift from decliners to advancers in the 2pm to 3pm hour confirmed the demand zone on the chart.

Traders and investors can chart this information on most trading platforms. You do not have to look at it from an intra-day standpoint but can also view it on a longer time frame. The chart below is showing the net of the Advancers minus the Decliners.

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 stocks 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.

The TRIN is unusual in that it moves opposite to the Dow. 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 an uptrend in the Dow to continue, the TRIN should make lower lows and show that buying volume is increasing.

If the TRIN is moving higher, then the selling pressure in the declining stocks’ volume is increasing. This is what you would expect for a downtrend to continue.

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.

As mentioned previously, you can check these market internals on both an intra-day basis or on a larger time frame to judge the health of a larger trend.

There are dozens of technical analysis tools that are available to the online trader and investor. Many of these have been discussed in past articles in this newsletter. One thing that you should always remember is that they are based on past prices and should only be used as an odds enhancer and not your sole decision maker. To learn more about how to incorporate these tools into your trading, visit your local Online Trading Academy center today!

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