Stock trading is literally a herd of human beings, reacting to stimuli, at the same time. “Herd” or “Mob” mentality is a natural phenomenon; like a colony of honey bees.
A clever person will identify patterns in behavior. Then use the probability of repetition to their advantage.
Post a sign offering free ice cream in a Christian church and people will line up to buy. Offer heroin in that church and those same people will hurt you.
Mob, stimuli, reaction, predictable pattern.
Each stock, index etc. has a particular group of people who favor trading it. Given the same news, the group who trade Apple, may react differently than the group who trade GE stock.Market internals are tools that can provide insight into what the herd is doing. They enable one to take an almost holistic approach to trading.Market internals can tell you things like, the markets trading volume, or what direction the majority of stocks are moving. Information is powerful.Let’s say the majority of issues on the New York Stock Exchange (NYSE) begin heading up. Given that most of the stocks in the S&P 500 (SPY) are traded on the NYSE, the SPY will often follow suit and head upAs with all trading tools, when incorporating market internals into ones routine; the key is identifying repeatable patterns. Successful people know what’s behind the tools they use, the $TICK and $ADDC are ones that I use to monitor the market and help with entries and exits.
What is the $TICK
$TICK is an untradeable index, that represents the net cumulative movement of the roughly 2,800 issues traded on the New York Stock Exchange. In this context; an issue is any stock, index, etc. “Net cumulative movement” is number of issues ticking up minus the number of issues ticking down. When $TICK reads +100, then 100 more of issues are ticking up then are ticking down. $TICK of -450 means 450 more issues are ticking down. $TICK at its daily Pivot Point reflects flat lined equilibrium. Note, conventional wisdom says zero, but I have found Pivot Points to be reliable every day. Ticking refers to the direction of the price of a issue. Up tick indicates a transaction has occurred at a price higher than the previous transaction. Down tick indicates a transaction at a lower price. $TICK has a possible range of plus to minus the total number of issues traded on the NYSE. At the beginning of each day, the charting system you use may delay printing the first bar. It may start at zero and move from there as instruments trade or, it may wait until at least one trade has executed against some large portion of all NYSE issues. $TICK is driven by price direction only; dollar value and volume are not factors. All issue weigh equally on $TICK. $TICK loses significance rapidly beyond the 1 minute period. It is unusual for a disproportionate number of issues to trade in one direction over the other. When $TICK reaches extreme levels in one direction, it is far more likely to reverse toward equilibrium than continue trending. This makes perfect sense when one considers what it means for the market as a whole. Back in the 1980s, 400 was extreme. In the 90’s, as more stocks hit the market, it moved closer to 800. In the early 2K’s, it started getting fresh with 1K. Today most people look at 400, 800 and/or 1000. Reality is, the extreme levels are influenced by volatility, and recent activity. Not saying the old numbers are worthless but, things have changed since Reagan was in office. I use Pivot Points on the $TICK chart, so extremes for me are the mid point, half way between Pivot Point and its R1, and S1 Lines. Pivot values adjust according to the current market, hence are reliable every day.
What’s Advance / Decline Line
Advance/Decline Lin ($ADDC) depicts the cumulative movement of all issues in the underlying group. In this context; an issue is anything like a stock or ETF. Advancing issues are the number of issues trading higher than the previous day’s close. Declining issues are the number of issues trading lower than the previous day’s close. Since $ADDC needs a starting point; the seed value is Net Advances from the preceding period. Formula for determining $ADDC is:
(# Advancing Issues minus # Declining Issues) plus Previous # Advance/Decline Issues
If previous day closed with $ADDC of 2000, then $ADDC opens at 2000. 250 issues move above their close from yesterday and 50 down, then $ADDC moves to 2200. Next 150 down, and 50 up, then $ADDC moves to 2100. Price and market capitalization are not factors. It has no partiality in that every issue has equal impact on the $ADDC.
Quick Side Note – $TICK counts issues moving up or down from one moment to the next. $ADDC quantifies issues trading above or below the previous days close. $VOLD quantifies the volume of all instruments on the NYSE moving up vs down.
So How do You Use the $TICK, $ADDC and $VOLD?
Use a 1M chart with the Tick and $ADDC line together. To learn how to use them, overlaid $ADDC onto my $TICK chart. I also keep a $VOLD chart up, also with $ADDC overlaid on it. Bring up a chart of SPY or /ES next to them and watched them for a few hours. I promise you will be amazed at how much you learn and this will help your trading.
I could and may one day write a book on the information that can be gleaned from this combination, but here are just a few quick examples:
- $TICK highlights counter-trend bounces offering solid entry opportunities, and insight into duration of the markets movement.
- $ADDC provides insight into market sentiment regarding the current trend, compared to yesterday.
- $VOLD shows how serious the market is about moving on direction or the other. If $ADDC is moving up, with $VOLD down, that says stock have moved higher, but the market is losing interest at these levels.