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TimRacette

Breadth, AD Line, Tick, Trin -- How They Can Improve Your Trading?

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The Market Internals are similar to the instrument cluster on your car, without them you really don’t know which direction you are headed or how fast you’re moving.

 

There are four indicators that make up the core market internals:

  • Breadth Ratio
  • Advance/Decline Line
  • Trin
  • Tick

 

Each indicator has a separate reading for the NYSE and NASDAQ, but our primary focus will be on the NYSE.

 

You can setup your trading screen to neatly display all four market internals in both chart form and numeric form. I have mine setup in grid chart format using the Thinkorswim platform.

 

market-internals.png

 

Specific instructions for setting up your own market internals charts using Thinkorswim can be found at the end of this article.

 

Breadth

 

The ‘Market Breadth’ or ‘Breadth Ratio’ is a volume ratio composed of volume flowing into up stocks versus volume flowing into down stocks.

 

The breadth ratio is expressed: Up Volume / Down Volume.

 

This reading is important in relation to where it has been, especially where we are now compared to where we opened on the day.

 

breadth-numbers.png

 

For example:

 

If at 10:00 AM we have 10M shares moving up and 5M shares moving down, the resulting breadth ratio is 2:1 positive (10M/5M), twice as much volume is flowing into up stocks as down stocks.

 

If at 10:30 AM the market has sold off but we now have a breadth ratio of 3:1 positive, this is a signal that the markets are actually becoming stronger and it’s time buy the pullback, so look for a long setup.

 

Out of all four internals, the breadth ratio is the most important.

Advance/Decline Line

 

The ‘Advance/Decline Line’ or ‘A/D Line’ for short, is the second most important of the internals. This indicator tells us the net sum of advancing stocks minus declining stocks.

 

The A/D Line is expressed: # of Advancing Stocks – # of Declining Stocks

 

There are roughly 3000 stocks listed on the NYSE and 3000 on the NASDAQ. An A/D Line reading of 1,500+ is very bullish and a reading of over 2,000 is extremely bullish. On the flipside readings of -1500 and below are very bearish and readings below -2,000 are extremely bearish.

 

These extreme readings are indicative of trending days where once the market continues to trend all the way into the close. We look to the A/D Line in conjunction with the Breadth Ratio to confirm these trend days.

 

For example:

 

A day with 2,500 advancing stocks and only 500 declining stocks would yield a net of +2,000 (an extremely bullish reading). It would take a large catalyst to shift the market direction with a reading this bullish.

 

If on the open you continue to see the A/D Line moving +500, +700, +900, this is a sign of market strength. If however, the market is moving higher, but the A/D Line is moving lower, a divergence has occurred and could be a sign of a market turn.

It’s important to look to the other market internals for confirmation as one indicator alone is not sufficient to confirm a move.

 

Trin

 

TRIN stands for TRaders’ INdex and was developed by Richard Arms in 1989 (it’s also referred to as the Arms Index). Its main purpose is for detecting overbought and oversold levels in the markets

 

The Trin is expressed: # of advancing stocks / # of declining stocks divided by

 

volume of advancing stocks / volume of declining stocks

 

The resulting Trin # is inverse to the market (a + reading is bearish, a – reading is bullish). A ratio of 1.0 means the market is at parity. A reading of 2.0 means much more volume is flowing into declining stocks. A reading of below 0.6 means much more volume is flowing into advancing stocks.

 

With the introduction of inverse ETFs the Trin has lost some of its appeal to intraday traders.

 

John Carter talks about the Trin in his book Mastering the Trade and has this to say…

 

If the Trin closes below 0.6, the market has an 80% change of selling off the next day.

 

If the Trin closes above 2.0, the market has an 80% change of rallying the next day.

If after closing above 2.0 the markets can’t rally the next day, a major selloff could be in store.

 

Tick

 

The NYSE Tick Index gives us the relationship of stocks up ticking versus down ticking at their last traded price. The Tick is an extremely useful tool for intraday traders.

 

For Example:

 

If there are 3000 stocks trading on the NYSE and 1500 trade higher from their previous price and 500 trade lower than their last price the Tick will read +1000. But wait what about the other 1000 stocks? They could be unchanged from their last price.

 

When using the Tick we are looking for extremes to enter or exit a trade. Tick readings of +1000 or -1000 are considered very strong as we typically trade between 1000 most of the time on the NYSE.

 

nyse-tick-chart.png

 

Tips for Using the Tick:

  • Tick readings within |400| indicate chop, ignore them
     
  • On a range day you can look to fade tick extremes
     
  • A 1 period moving average can make it easier to see the trend of the Tick

 

Note the extreme tick readings for the day:

 

  • When we get a high tick and a high in price at the exact same time, this could indicate the high of the day.
     
  • When a high tick prints without a simultaneous high price we can continue to make new highs, until a new high tick is reached (the reverse is true for a low tick followed by new lows).

 

Here are some live trading videos using the tick.

 

Market Internals Setup Instructions

 

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Very nice article, unfortunatly not many traders follow these internals and if they did they are not emphasized as much as they should. I takes time to get used to looking at them and understanding their patterns and levels. :applaud::applaud::applaud:

 

Thank You

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The Market Internals are similar to the instrument cluster on your car, without them you really don’t know which direction you are headed or how fast you’re moving....

 

did you write that article?

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The market internals are what I trade by. That and support and resistance. I have no use for indicators based on price. All the market internals do trend, and it is possible to make sense of them.

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Tim,

 

If you like the Breadth Ratio when trading say the ES, why don't you make a ratio

of the bid-ask volume of ES.

ie ask vol/total vol.

 

Perhaps you have already tried this, in which case I would be interested in your thoughts and comparison of the two ratios.

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Tim,

 

If you like the Breadth Ratio when trading say the ES, why don't you make a ratio

of the bid-ask volume of ES.

ie ask vol/total vol.

 

That's interesting I have not tried that. I'll play with the idea a bit. Thanks.

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That's interesting I have not tried that. I'll play with the idea a bit. Thanks.

 

You are welcome.

 

The reason I mention it, is because a disconnect has taken place between The Indices and the underlying stocks.

I imagine the QE's are to blame, and so while I agree with your comments in this thread, I have come to accept this disconnect and now trade The Indices as stand-alone Instruments.

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To take the other side of that argument in playing devils advocate, the indices (NASDAQ for instance), is made up of individual stocks, the NASDAQ internals therefore are made up of data from those stocks so I still would consider them connected.

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To take the other side of that argument in playing devils advocate, the indices (NASDAQ for instance), is made up of individual stocks, the NASDAQ internals therefore are made up of data from those stocks so I still would consider them connected.

 

 

Good for you Tim.

We each have our point of view and it keeps life interesting.

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Hi Horace,

 

I have an interest in your comment about the Q's being disconnected from the underlying stocks. Could you elaborate? I agree with the comment, I have noticed that the Qs lead the movement, they moved before the stocks that make it up. Is that what you are seeing. Ofcourse some times they do not all the time

 

cheers

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Hi Horace,

 

I have an interest in your comment about the Q's being disconnected from the underlying stocks. Could you elaborate? I agree with the comment, I have noticed that the Qs lead the movement, they moved before the stocks that make it up. Is that what you are seeing. Of course some times they do not all the time

 

cheers

 

Yes If you dig into the internals of The Indexes and compare it to Stocks, the disconnect becomes evident.

That is why I only follow the Indexes on the assumption that sometimes they connect and sometimes they don't, but they stand alone 100% of the time.

 

Also, I try to follow the least information possible.

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"On the surface" the NYSE internals, $TICK, $advancers, $Decliners, UpVolume, DownVolume often do NOT sync perfectly with the ES. So there is a seeming disconnect between those internals and the ES. But, all the internals tell exactly why the ES does what it does if you learn how to "read the tea leaves". There is a complexity to reading the signals, and you have to know how all 3 sets of internals interact with each other. For example, sometimes the $TICK and the ES go out of sync with the $Advancers/$Decliners. But they will sync back up very soon, and the $Advancers/$Decliners usually win the battle.

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"On the surface" the NYSE internals, $TICK, $advancers, $Decliners, UpVolume, DownVolume often do NOT sync perfectly with the ES. So there is a seeming disconnect between those internals and the ES. But, all the internals tell exactly why the ES does what it does if you learn how to "read the tea leaves". There is a complexity to reading the signals, and you have to know how all 3 sets of internals interact with each other. For example, sometimes the $TICK and the ES go out of sync with the $Advancers/$Decliners. But they will sync back up very soon, and the $Advancers/$Decliners usually win the battle.

 

Yes I agree with you TW, however your use of the word "complexity" sends a cold shiver down my spine as simultaneously a voice alarm goes off in my head "PULL UP, PULL UP, PULL UP"

 

I rather feel that these complex mental gymnastics must be left to far more gladiatorial minds than mine when trading.

 

In fact my trading mind now is very much like a dog on a leash, in that it is allowed to probe slightly to the left, or right, or it may adventure ever so slightly ahead but it's days of glory, roaming through hoards of information with all the thrill and excitement of a Free Range Chicken have come to an end.

 

And so it is not that The Internals lie ahead of me offering all the academic thrill of a new crossword or game of Solitaire ... no not at all ... they in fact lie fondly remembered and used, but discarded like an empty water bottle in a Marathon.

I know where they are should I ever need to return.

Edited by horace

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I think the discunect can work for your benefit sometimes. I haven't look as close at the markets in the last 3months as I have been busey writing my first "blackbox" But I used the Qs volume with the Qs levels. After the crisis we had, the Qs have been getting sudden burst of volume at lows or highs of the days. at lows these bursts stopped the sincking and reversed the trends and on highs they usually broke the high but failed shortly after.

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TOS did not know anything about the Breadth Ratio. A thinkscript member offered a thinkscropt for  some indices but not the /NQ that I am trading. Is there  any source for the breadth Ratio?

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