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Market Internal Basics

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Market Internal Basics

  1. 1. Market Internal Basics and Broad Market Analysis
  2. 4. <ul><li>Tools, tactics, indicators that gauge investors attitudes toward the market </li></ul><ul><li>Quantify the levels of optimism or pessimism in various markets </li></ul><ul><li>Market trends end and reversals often occur at sentiment extreme measures </li></ul><ul><li>“ Smart traders” trade in direction of trend until it ends </li></ul><ul><ul><li>Then maneuvers towards the new direction </li></ul></ul><ul><li>Novice & inexperienced traders often fade trending markets trying to countertrend trade </li></ul><ul><ul><li>Often abandon winning trades to early and repeat the cycle over and over again </li></ul></ul>
  3. 5. <ul><li>Two distinct categories of traders in market place </li></ul><ul><ul><li>Commercial / Institutions – Traders uses futures as hedging instruments </li></ul></ul><ul><ul><li>Non-Commercial / Retail - Traders uses futures for speculation and profit generation </li></ul></ul><ul><li>Reports are released on a regular basis and information is readily available online for current business atmosphere and project trends </li></ul><ul><li>Economic/business fluctuations </li></ul><ul><ul><li>Significant pre-market moves </li></ul></ul><ul><li>GDP, CPI and other distinguish reports can easily influence the markets </li></ul>
  4. 6. <ul><li>Most Popular sources for headlines </li></ul><ul><ul><li>Wall Street Journal </li></ul></ul><ul><ul><li>New York Times </li></ul></ul><ul><li>Traders often search and scan for “strong commentary/language” </li></ul><ul><ul><li>Tops of the markets often associated with </li></ul></ul><ul><ul><ul><li>Surge </li></ul></ul></ul><ul><ul><ul><li>Explode </li></ul></ul></ul><ul><ul><li>Bottoms in the markets often associated with </li></ul></ul><ul><ul><ul><li>Plummet </li></ul></ul></ul><ul><ul><ul><li>Plunge </li></ul></ul></ul><ul><ul><ul><li>Tank </li></ul></ul></ul><ul><li>Trend reversals (V tops & bottoms) often occur from underline themes </li></ul><ul><ul><li>Reading between the lines </li></ul></ul>Now…the internet is the most popular source for news
  5. 8. <ul><li>Tick Indicator Defined </li></ul><ul><ul><li>Used to determine market strength and directional changes </li></ul></ul><ul><li>Guidelines </li></ul><ul><ul><li>Look at # of stocks trading on an uptick vs. a downtick. </li></ul></ul><ul><ul><li>Used intraday to determine when the market may change direction. </li></ul></ul><ul><ul><li>Lead to Broad market support and resistance. </li></ul></ul><ul><ul><li>For the general market, prior high and lows are points of support and resistance. </li></ul></ul><ul><ul><li>Bullish notion = Trading ranges > 0 (more trading on upticks, favors longs) </li></ul></ul><ul><ul><li>Bearish notion = Trading ranges < 0 (more trading on downticks, favors shorts) </li></ul></ul>
  6. 9. <ul><li>TRIN Indicator Defined </li></ul><ul><ul><li>Used to determine who is in control of the market </li></ul></ul><ul><li>Guidelines </li></ul><ul><ul><li>(Advancing Issues/Declining Issues)/(Advancing Volume/Declining Volume) </li></ul></ul><ul><ul><li>Indicate overall market bias </li></ul></ul><ul><ul><li>Bearish notion = Readings > 1 (more volume going into declining issues) </li></ul></ul><ul><ul><li>Bullish notion = Readings < 1 (more volume into advancing issues) </li></ul></ul><ul><ul><li>Absolute value is important, but trend is more important </li></ul></ul><ul><ul><li>UP Trend is Bearish, DOWN Trend is Bullish </li></ul></ul><ul><ul><li>Extreme readings (> 1.5- or < .35) often leads to contrarian indicators </li></ul></ul>
  7. 10. <ul><li>NASDAQ Sectors </li></ul><ul><li>Semiconductors </li></ul><ul><li>Biotech </li></ul><ul><li>When aligned (either Bullish or Bearish) with Russell Futures, patterns are likely to follow through. </li></ul><ul><li>NYSE Sectors </li></ul><ul><li>Banking </li></ul><ul><li>Brokers </li></ul><ul><li>Transports </li></ul><ul><li>When aligned (either Bullish or Bearish) with DOW and S&P 500 Futures, patterns are likely to follow through. </li></ul>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.
  8. 11. Natural pullbacks in price action Ideal trading situation ENTRY <ul><li>LONG Entry </li></ul><ul><li>Up trend </li></ul><ul><li>Higher Highs & Higher Lows </li></ul>Price Action 4 4 4 4 4 4
  9. 12. Ideal trading situation ENTRY <ul><li>LONG Entry </li></ul><ul><li>Up trend </li></ul><ul><li>Higher Highs & Higher Lows </li></ul>Price Action 4 4 4 4 4 4 Natural pullbacks in price action
  10. 13. <ul><li>TRIN is suppose to measure volatility within the stock market. </li></ul><ul><ul><li>The TRIN represents the relationship between advancing and declining issues by measuring their volume flow. </li></ul></ul><ul><li>The TRIN is commonly used as a short term trading tool. </li></ul><ul><li>The TRIN also has an inverse relationship with the Tick. </li></ul><ul><li>In contrast to the Tick, a rising TRIN signals that the Bears are beginning to take control. </li></ul><ul><li>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. </li></ul>
  11. 14. 2. Bullish Rally 3. Sideways Topping Action 1. Sideways Bottoming Action 4. Bearish Rally 1. Sideways Bottoming Action Transition Among Phases Indicator provides signal Buy Short SOH SOH Focus Here…
  12. 15. Ideal trading situation ENTRY <ul><li>LONG Entry </li></ul><ul><li>Up trend </li></ul><ul><li>Higher Highs & Higher Lows </li></ul>Price Action Natural pullbacks in price action
  13. 16. +1 -1 0 TRIN Indicator Buy signal Ideal trading situation ENTRY <ul><li>Price Action - LONG Entry </li></ul><ul><li>Up trend </li></ul><ul><li>Higher Highs & Higher Lows </li></ul>Price Action +1 +1 +1 +1 +1 +1 Natural pullbacks in price action
  14. 17. Buy signal Ideal trading situation ENTRY <ul><li>Price Action - LONG Entry </li></ul><ul><li>Up trend </li></ul><ul><li>Higher Highs & Higher Lows </li></ul>Price Action -1 -1 -1 -1 -1 -1 Natural pullbacks in price action +1 -1 0 TRIN Indicator
  15. 18. <ul><li>Helps us to determine whether volume is flowing into advancing or declining issues. </li></ul><ul><li>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. </li></ul><ul><li>A rising TRIN depicts a weak market and a falling TRIN depicts a strong market. </li></ul><ul><li>What is important on this indicator is not only what the current reading is, but the trend of the indicator. </li></ul><ul><li>Is it changing character, providing evidence of going from selling to buying or vice versa. </li></ul>
  16. 19. <ul><li>Consider Up Trend Price Action </li></ul><ul><ul><li>Look for Candlestick bullish patterns and setups </li></ul></ul><ul><ul><li>Reversal Bar – price action closes above the high of the previous bar </li></ul></ul><ul><ul><li>Count price action candlesticks – 3 or more consecutive down bars (lower highs and higher lows) </li></ul></ul>Candlestick Reversal Setup - PLUS - Buy signal +1 -1 0 TRIN Indicator
  17. 20. Use technical analysis for BUY signals Use technical analysis for for SHORT signals Trading with the trending price action. 1 2 3 1 3 2
  18. 21. <ul><li>To identify when the markets are advancing and declining based on price action and use market internals as “weight-of-evidence”. </li></ul><ul><li>Understand that market internals often presents the markets as lop-sided </li></ul><ul><li>Derivations of market internals can easily provide an inaccurate picture of the broad markets </li></ul><ul><li>What if you could have a set of modified market internals that made your interpretations easier…. </li></ul>

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