Interpreting Market Internals in Context

Key Takeaways
• The power of the market internals comes when you look at them in context. When at key
reference areas, they can provide early tells for the eventual direction of market moves, or
allow us to better time expected reaction.

• It’s dangerous to try to over-read the internals, especially out of context. Don’t look to trade
off of them based on every little wiggle. If you use them as general gauges for the health of
market movement and the type of day we’re likely to get, while looking for divergences at key
reference areas, they will serve you best.

• Multiple divergences in the A/D Line at a key reference area could be a great early tell that
we’ll get a sizeable reaction the other way. This becomes especially useful when we’re in
situations where it’s unclear whether the major trend will continue, or an intermediate term
trend the other way will ensue. Divergences in the A/D Line could tip the scale one way or the
other.

• If we’re hitting a major key reference area intraday, and it’s a wide key reference area from a
larger time-frame, sometimes it’s hard to know where within that large key reference area
could actually reverse during the current day. NYSE TICK extremes can help you better time
potential reversals. If the context says that the odds are high that the key reference area will
hold, then hitting an extreme in the TICK could alert you to a potential exhaustion point and a
good area for the reversal to take place. (Unless it’s a pure trend day, in which case it’s almost
never a good idea to stand in its way).

• If you see a clear divergence in the A/D Line at a key reference area, an extreme in the NYSE
TICK could help you time the likely reversal in that area.

• This previous point hints at an important principle: the more factors that align, the more the
probabilities are compounded in favor of a certain scenario unfolding. The highest odds moves
take place when the trends are aligned on different time-frames, and we’re at a key reference
area(s) aligned with the trend, and we’re seeing divergences and extremes that point to an
exhaustion of the current smaller counter-trend move.

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