market internals

Execute Smarter trades by utilizing market internals and core sectors.

Posted by Investing Freak on January 10, 2011
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The following is meant to serve as a guide on how to use market internals to gauge the market when day trading. That being said, the core sectors mentioned below can be used on longer timeframes such as Daily and Weekly to gauge the market direction for the main sectors of the market. As always, keep in mind that what works for one trader (me) might not work for you.

Update: As of July 2011 Brad is back at shadowtrader after taking a break so go listen to him daily if you have thinkorswim.
I initially came to learn about these core sectors and market internals while on ShadowTrader chat that was moderated by Brad Augunas before he was replaced.  The ShadowTrader core index can be accessed to those of you that have a thinkorswim account and have the desktop software installed. Once that is taken care of you can click on “Market Watch” tab, then click on “Watch” and finally Scroll through the “Public” section until you reach “ShadowTrader Core Sectors”. If you have done it correctly you should see a screen like the one below.

Before I move on to the core sectors I want to point out the top right corner of the screen above. This is where the Advancing and Declining sectors are summarized.  So far I have only used this for the benefits of intraday but I will test out the theory that it can also help with long term market prediction. How Brad would summarize this is “The Sectors are 12-4 negative”

The volume shows how much volume goes into the advancing sectors and how much is going into declining sectors. 12,567,261 shares were going into Advancing sectors and 158,799,054 were going into declining sectors. With some quick division we are “12.6 to 1 negative” meaning 12.6 times more volume is going to the downside.

Finally the capital flow is also fairly important in seeing where the money is flowing and when, here we have $37,931,394 on the Advancing issues and $367,886,885 on the Declining issues, therefore another quick division leads us to the “9.7 to 1 negative” which means almost 10x more money is going to the downside.

By gauging these internals you wouldn’t want to get in front of the Bear train unless you saw a change in internals right? Here is an example in the chart below.

As you can see from 1:30-4pm the Sectors moved from 12-4 (or 3-1) negative to neutral (1-1), the volume went from 12.6 negative to 7.3 negative (an improvement) and the capital flow which was almost 10-1 for the bears dropped to about 2.5-1 negative (more money was being thrown to the upside) so if you were day trading it would have been wise to reverse or exit your short positions.

At 12:45pm on Friday there was the most picture perfect Bull Hammer Candlestick pattern which should have been plenty to signal a trend reversal, but the internals helped confirm it.

If you don’t have access to thinkorswim I cannot find another way for you to gouge the market internals but I will link the16 core sectors chosen by ShadowTrader. They can be used intraday to gauge the strong or weak sectors or they can be used to view the long term direction of a certain sector by being graphed into daily or weekly charts.  All the links below point to StockCharts.com

  1. $DJUSHB (Dow Jones US Home Construction Index)
  2. $DJUSIT (Dow Jones US Industrial Transportation Index)
  3. $DJUSNS (Dow Jones US Internet Index)
  4. $DJUSSW (Dow Jones US Software Index)
  5. $BKX (Bank Index – Philadelphia)
  6. $BTK (Biotechnology Index)
  7. $DRG (Pharmaceutical Index)
  8. $GOX (CBOE Gold Index)
  9. $HCX (S&P Healthcare Index)
  10. $IUX (S&P Insurance Index)
  11. $OSX (Oil Services Index – Philadelphia)
  12. $RLX (S&P Retail Index)
  13. $SOX (Semiconductor Index – Philadelphia)
  14. $UTY (Utility Index – Philadelphia)
  15. $XBD (Broker/Dealer Index – AMEX)
  16. $XOI (Oil Index – AMEX)

I am attaching a final chart here which includes all 16 minicharts and I hope you don’t get too dizzy staring at it. Click the Image to Enlarge.

I wish you all the best in using these indicators and I always welcome questions and new ideas so don’t be shy to plop them down on the comment box below.

Happy & Profitable Trading,

-K

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