While price and volume are the main indicators to follow they are certainly only ones. I watch the action of the market internals very closely as they clue me into what may be in store about the future price action. This will also tell me if/when a trend is changing and the magnitude. Lately the internals have been telling a story, and it’s not a good one.
Internals tend to move in waves with money flows each day. We can get a good read on the health of the market by looking at breadth, depth, short term trading index (TRIN) and the tick.
Breadth is the most critical of these internals. This is simply up/down volume, and this reading can spill over intraday to more buying or selling to end the day. The accumulation of several weak breadth days as we have had lately tell us market participation is weak.
Market depth is a concept not many consider but it is crucial to know if there is a strong market presence. Depth is simply buys/sells lined up and the strength of the numbers. Good depth tells us there is volume and liquidity, a fair market is established. Weak depth can cause very jagged moves and highly volatile activity.
Advance/decline line tells us the net sum of advancing/declining stocks. A strong A/D line says money is flowing to issues that continue to rise as the market is trending upward.
The TICK is a great tool for intraday traders. It’s a simple tool that says the number of stocks ticking higher vs. those ticking lower. Extremes are what we look for here, with levels of +1000 and -1000 the key levels where a reversal may be at hand.
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