The
tools of the trade: TRIN, TICK, prem, pc ratio, and tape are all important tools when understanding market internals. Understanding market internals is like a xray of a patient. Without it you do not fully have a clear picture of the problems.
One way to look for market strength or weakness is by looking at the TICK's. The TICK and price move in very similar ways. If the TICK follows price, you have confirmation in that direction. However, if the TICK's are unable to follow price and a divergence exists, look at this as a warning signal. Perhaps the market has lost its steam.
The chart posted below from August 23rd, 2006. After a decent morning rally, we met resistance right in the
value area. Notice the double top and quick rejection of price which led to a 100 point decline. It is close to impossible to catch the entire ride down. However, by understanding market internals you could have anticiapted a sell-off or even a warning signal.
Look at the post below: