Breadth

Internal
Indicators 1
 Disclaimer
It should not be assumed that the methods, techniques, or indicators presented in this book and seminar will be
profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in
this book and seminar are for educational purposes only. This is not a solicitation of any order to buy or sell.

“HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS.

UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, SINCE THE TRADES IN THIS BOOK and SEMINAR HAVE NOT ACTUALLY BEEN
EXECUTED, THE RESULTS WE STATE MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT,
IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING
PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE
BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS
LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.”

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2
 Table of Contents
Introduction
What moves stocks?
bullish or bearish
Why use Market Internals
Methods of Interpretation
Historical Values and Time Frames
Course Goals
Breadth Indicators
Definition, Importance and
Interpretation of Short and Long
Term Time Frames
Advancing Stocks and Volume
Ratios, New Highs, New Lows
TRIN, McClellan Oscillator,
Advancing Stock Ratio and more
Sentiment Indicators
Determining when the crowd is too
Equity, Total and OEX P/C Ratios
Volatility Index (VIX and VXN)
Bulls vs. Bears Sentiment Surveys
Intra-Day Internals
TICK
TRIN
Trading relative strength and weakness
Sector Lists
Reversal Times
Advanced TICK Analysis
Advanced TRIN Analysis
Advancing minus Declining Stocks
Advancing minus Declining Volume.
Total Put/Call Ratio 3
 Market Internals Analysis
What Moves This Whale and How Market Internals Time Entries?

The stock market acts as a discounting barometer

that reads fundamentals, technicals, and the
beliefs of participants all over the world.
Enter per
Trading Plan
Sector Analysis
Manage in
Market Internals between Reversal Times
Sector Breadth
strength and TPMs
Sentiment
Bonds weakness
Inter-market
Commodities Compelling Advance-Decline, Volume,
Technical etc.
Currencies Pattern TPMs
Stocks Bull-Bear %, Put-Call, etc.

Inter-Market Analysis 4
 Market Internals Analysis

Why Use Market Internals?

Market Internals provide an objective comparison between the current market

environment and the past based on historical references.

Market Internals act as gauges that provide us a bias based on what the market
is actually doing, rather than relying on others’ opinions.

Similar to a pilot using an airplane's instruments, internals give early warning

signals of possible or imminent danger at extremes.

Market Internals give us the confidence to hold existing positions, despite prices
being extended short-term.
5
 Market Internals Analysis

Getting The Most From This Short Course

It is imperative that you understand how to interpret the internal’s patterns, then

review historical levels as well as current ones to gain a working perspective.

Internals are not a magical black box. They form different patterns in different

market environments, which I will show you. They also lead market turns.

I will show you how to use this information to determine market turning points

when multiple internals are in alignment.

6
 Market Internals Analysis

Methods of Interpreting Indicators

By first reviewing historic extreme levels of an indicator, we can determine
trigger levels that may guide us to turning points in the current market.

Points of observation in reviewing internal indicators:

Trend and support and resistance

Historical extremes

Speed that an indicator moves between extremes

The patterns formed at overbought or oversold levels

Divergences between price and the Indicator

7
 Market Internals Analysis
Bell Curve and Extremes
Normal
Distribution A bell curve is a plot of normal

Extremes Extremes distribution of a given data set.

To create our alert levels for any

Market Internal, we will encompass
about 85 - 95% of the data’s range.

Alert Areas Extremes Top and bottom lines alert

extremes.

Extremes
Alert Areas 8
 Market Internals Analysis
Historical Extremes are based on the internal’s prior reversal areas, not the
market’s price data.

Alert “areas” are where the indicator reversed over an extended period of time.

Then compare those alert areas to the market for tradable events.
Moving Average (1.01979)(CLose - 10-MA)
1.100
1.095
1.090
1.085
1.080
1.075
1.070
1.065
1.060
1.055
1.050
1.045
1.040
1.035
1.030
1.025
1.020
1.015
1.010
1.005
1.000
0.995
0.990
0.985
0.980
0.975
0.970
0.965
0.960
0.955
0.950
0.945
0.940
0.935
0.930
0.925
0.920
0.915
0.910
0.905
0.900
0.895
0.890
0.885
0.880
0.875
0.870
0.865
9
Jul Aug Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct
9
 Market Internals Analysis
The speed that an indicator moves between extremes - A sharp, fast move
from one extreme level to the other (A) indicates strength in that direction.

How it became overbought can actually suggest higher prices and vice versa.
1170
1160
1150
1140
1130
1120
1110
1100
1090
1080
1070
1060
1050
1040
1030
1020
1010
1000
990
980

0.7
0.8
0.9
1.0

A 1.1
1.2

A A 1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2

8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 20 26 2 9 17 23 1 8 15 22 29 5 12
eptember October November December 2004 February March April 10
 Market Internals Analysis
The patterns formed at OB/OS levels:

Basing at an OB/OS levels indicates strong market breadth.

Consolidation often occurs after a sharp move between extremes.

A V-type reversal after a move between extremes indicates weak market breadth.

V-type McClellan Oscillator (44.7479), McClellan Oscillator (44.7479)

Basing at 230
220
210
200

Overbought (OB)
190

reversal extreme 180

170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-130
-140
-150
-160

Oversold (OS) -170

-180
-190
-200
-210
-220
-230
-240
-250

13 20 27 3 10
November
17 24 1 8
December
15 22 29 5
2004
12 20 26 2 9
February
17 23 1
March
8 15 22 29 5
April
12 19 26 3
May
10 17 24 1
June
7 14 21 28 6
July
12 19 26 2
August
9 16 23 30 7 13
September
20 27 4
October
11
11
 Market Internals Analysis
Divergences between market new lows and indicator lows (higher
lows) indicates internal market strength in a downtrend and vice versa.
1550

1500

1450

Bearish B 1400

1350
Divergence 1300

1250

1200

Bullish 1150

A
1100
Divergence 1050

350

300

B 250

200

150

100

50

-50

-100

-150

A -200

-250

7 14 21 28 5 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 26 2 8 16 22 29 5 12 20 26 5 12 19 26 2 9 16 23 30 7 14 21 29 4 11 18 25 2 9 16 23 30 6
ust September October November December 2001 February March April May June July Augus 12
 Market Internals Analysis

Course Goals
By understanding how to interpret the internals’ patterns and noting their

historical levels as well as current ones, we can gain a working perspective.

Realize that internals are not a magical black box. They form different patterns

in different market environments and trigger levels can change.

My goal is to objectively show you how to use this information when multiple

internals are in alignment, with price always being the final reason to trade.

Roll up your sleeves and get motivated as the end journey will be well worth it!
13
Market Breadth
Indicators
14
 Guidelines for Market Internals

Breadth indicator signals are stronger when multiple indicators are aligned.

They act as contrarian or confirming indicators at historical extremes.

Extreme readings do not mean the market will change trend, but can suggest the
risk of a short-term reversal is increasing.

When multiple internals are in alignment, and diverging from the current price
trend, the odds of a reversal increase dramatically.

The addition of traders’ sentiment increases the accuracy of breadth indicators.

15
 Market Breadth Analysis
Internal breath indicators are derived from daily Advancing Stocks, Declining Stocks and/or
Advancing Volume, Declining Volume, and New Highs, New Lows.

Advancing issues are the number of stocks that closed higher from the prior day’s close.

Declining issues are the number of stocks that closed lower from the prior day’s close.

Advancing Volume is the amount of volume going into advancing issues.

Declining Volume is the amount of volume going into declining issues.

New Highs are the number of stocks making 52-week highs.

New Lows are the number of stocks making 52-week lows.

NY-ADVIS 2500 NY-ADVVL NY-HIGHS 200
10000
2000 150

1500 100
5000
1000 50
x100

June July August June July August June July August

NY-DECIS NY-DECVL NY-LOWS
2500
10000 100
2000
1500
5000 50
1000
x100

June July August June July August June July August 16

 Internal Breadth Indicators

Advance-Decline Line - Cumulates the close of Advancing Issues – Declining Issues

McClellan Oscillator - 19 EMA – 39 EMA of Advancing Issues – Declining Issues

Advancing Stocks Ratio - Advancing Issues / (Advancing Issues + Declining Issues)

Advancing Volume Ratio - Advancing Volume / (Advancing Volume + Declining Volume)

TRIN Indicator - (Advancing stocks / Declining stocks) / (Advancing Volume / Declining Volume)

New Highs minus New Lows Histogram - New highs – New Lows

New High Ratio - New highs / (New highs + New Lows) 17

 Market Breadth Analysis
The A/D Line is “considered” a measure of broad market strength or weakness. When
more stocks are advancing than declining, the A/D rises (and vice versa)
Divergences between price highs and A/D highs are considered bearish, and vice versa.

Advance-Decline (A/D) Line- Cumulate the close of Advancing Issues – Declining Issues
10000
-500
9000
NYSE A/D Line 8000 NASDAQ A/D Line -1000
7000

6000 -1500
5000

4000 -2000
3000

2000 -2500

1000
-3000

Advances minus Declines x10 -1000 Advances minus Declines x100

2000 2000
1000 1000
0
0
-1000
-1000 -2000
-2000 -3000
-3000 -4000
1996 1997 1998 1999 2000 2001 2002 2003 2004 1996 1997 1998 1999 2000 2001 2002 2003 2004 18
 Market Breadth Analysis
The NYSE A/D Line can lead or show a The NASDAQ A/D Line declined for
divergence for long periods of time. This years, although price action provided
makes the timeliness of this indicator poor. incredible trading opportunities.
1600
5000
S&P 500 1500
1400
NASDAQ
4500
1300
4000
1200
1100 3500
1000 3000
900
2500
800
700 2000
600 1500
B C D 500
1000
400

A 10000
9000
F -500

8000
7000
E G -1000

6000 -1500
5000
4000 -2000
3000
2000 -2500
1000
-3000
NYSE A/D Line x10 -1000
NASDAQ A/D Line x100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1996 1997 1998 1999 2000 2001 2002 2003 2004 19
 Market Breadth Analysis
The McClellan Oscillator’s value is based on the difference between the values of two
moving averages of advancing issues minus declining issues. For example, if the short-
term MA value is 100 and the longer-term MA is 20, the Oscillator’s value would be 80.

The McClellan Oscillator rarely moved above +100 or below -100 in the past. As more
stocks were listed for trading, values between +/- 100 to 200 became the extreme.

NYSE McClellan Oscillator NASDAQ McClellan Oscillator

2020
 Market Breadth Analysis
McClellan Oscillator - 19 EMA – 39 EMA of Advancing Issues – Declining Issues
Advances - Declines Advancers minus Decliners
1500
1000 is needed for the calculation.
500
0 Daily Extremes are between
-500
-1000 +/- 1000 - 1500.
-1500
-2000
19 EMA 19-Day and 39-day The oscillator is the
500
MA’s
Cross difference between the 19-
Cross
0 and 39-day exponential MAs

39 EMA of advancers minus decliners.

Is showing the distance between the Cross -500
MAs. The distance is equal to the MA crosses coincide with
Oscillator current value. McClellan Oscillator 250
200
150
moves above/below zero.
100
Cross Cross 50 The overbought level is
0
Cross -50 between +100 and +200;
-100
-150 oversold level is between -100
-200
November 1999 February March April May June
and -200. 21
 Market Breadth Analysis
Divergences between price and oscillator extremes will alert us to probable market turns.
Initial extreme readings are the first alert of a possible top or bottom.
A’s show fast, sharp moves in McClellan. The B’s show divergences
S&P 500 and NYSE McClellan Oscillator. NASDAQ and its McClellan Oscillator
1100 1750
1700
1050 1650
1600
1000 1550
B 1500
950 1450
1400
900 1350
1300
850 1250
1200
Retest 800 1150
1100
750 B
B 250
Sharp move between extremes B 250
200 200
150
-BD
150
100
100
A 50

A A
0
-50
A 50
0
-100
-50
-150
-200 -100
Sharp moves Sharp move -250
+BD -150
Very extreme! -300
B -350
B
-200
y Jun Jul Aug Sep Oct Nov Dec 2003 Feb y Jun Jul Aug Sep Oct Nov Dec 2003 Feb 22
 Market Breadth Analysis
The McClellan Oscillator leads turns in both the NYSE and NASDAQ. A move to an extreme
level does not mean the market will reverse. Typically, there will be a divergence first (A).
A price reversal pattern and other internals must always confirm.
S&P 500 and it’s McClellan Oscillator. 1170
NASDAQ and its McClellan Oscillator
A -BD -BD
1160
1150
A 2150

2100
1140
1130 -BD 2050
1120
1110 2000
1100
1090 1950
1080
1900
1070
1060
A 1050
1040
1850
1800
1030 +BD
350 A 1750

Sharp move between extremes

-BD 300
250
A -BD
200
150
200
-BD 150 100
100 50
50
A 0
-50
0

-100 -50
-150 -100
-200
Basing below zero A -250
-300 A -150
-200
Very extreme after a price drop! -350 +BD
-400
Dec 2004 Feb Mar Apr May Jun Jul Aug Dec 2004 Feb Mar Apr May Jun Jul Aug 23
 Market Breadth Analysis
Advancing Stocks Ratio (ASR) - Advancing Stocks / (Advancing Stocks + Declining Stocks)

The Advancing Stocks Ratio calculates the number of advancing stocks as a percentage of
the total stocks. This does not consider stocks closing unchanged on the day.

A 21-day MA of the ASR will be used to smooth the day-to-day data.

The 21-day ASR provides a longer-term measure of the market being overbought or
oversold. We’ll use it as a companion to the short-term McClellan Oscillator measurement.

Advancing Stocks divided by Advancers + Decliners equals Advancing Stocks Ratio

.73026 0.8
2377 2500 3400 0.7

2000 0.6
3350
0.5
1500
3300 0.4
1000 0.3
3255 3250
500 0.2
3200
May June July August May June July August May June July August 24
 Market Breadth Analysis
NYSE Advancing Stocks Ratio 0.9
The Advancing Stocks
0.8

0.7 Ratio’s day-to-day swings

0.6
are very erratic, but
0.5

0.4 extremes can be an early

0.3
indication of a reversal.
0.2

0.1
12 19 26 2 9 16 23 30 7 20 27 4 11 18 25 1 8 1
The NYSE bullish level
August September October November is .3; bearish level is .7
NASDAQ Advancing Stocks Ratio
0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30 The Nasdaq bullish level
0.25 is .3; bearish level is .7
0.20
12 19 26 2 9 16 23 30 7 20 27 4 11 18 25 1 8 1
August September October November
25
 Market Breadth Analysis
NYSE 21-Day Advancing Stocks Ratio
0.60 A 21-period MA is used to
smooth the daily ASR close.
0.55

0.50
NYSE bullish levels are .45 to
.42; bearish levels are .55 to .58
0.45

A A 0.40

Nov Dec 2004 Mar Apr May Jun Jul Aug Sep Oct Nov

NASDAQ 21-Day Advancing Stocks Ratio 0.57 Nasdaq Bullish levels are .46 to
0.56
0.55 .44, bearish levels are .52 to .54
0.54
0.53
0.52
0.51
0.50 A double bottom pattern like
0.49
0.48
0.47 the May-August one at (A) is
0.46
0.45 always considered as a potential
0.44

A
0.43 market bottom signal.
A 0.42
0.41
Nov Dec 2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 26
 Market Breadth Analysis
The overbought signals after (A), in the ASR -BD S&P 500
1150

produced minor corrections or consolidations, 1100

which is confirmation of a bull market.

(B)
1050

1000
Consolidation
(B) Breakdowns 950

900
The breakdown at (B) suggested a bearish 850

break, but the bullish 21-Day ASR would 800

+BD have kept you from joining the bearish camp. 750

-BD 0.60
21-Day ASR
(A), 0.55

0.50

Extended time above

neutral is bullish 0.45
+BD
0.40
Extreme
g Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun Jul Aug 27
 Market Breadth Analysis

Advancing Volume Ratio (AVR) - Advancing Volume / (Advancing Volume + Declining Volume)

The AVR calculates the amount of advancing volume as a percentage of the total volume.
This does not consider the volume of stocks that closed unchanged on the day.

The 10-day and 21-day MA of the AVR smoothes the day-to-day data. The two lengths of
smoothing will provide a short-term and longer-term measure of advance-decline volume.

Advancing Volume divided by Advance + Decline Vol. equals Advancing Volume Ratio
19000 .85201 0.9
1,051,407 18000 0.8
1,234,026. 17000 0.7
10000 16000 0.6
15000 0.5
14000 0.4
5000 13000 0.3
12000 0.2
11000 0.1
x100 x100

May June July August May June July August

May June July August 28
 Market Breadth Analysis
NYSE Advancing Volume Ratio 0.9
0.8
0.7
The Advancing Volume
0.6
Ratio’s day-to-day swings are
0.5 very erratic.
0.4
0.3
0.2 Extremes can be an early
0.1 indication of a reversal
12 19 26 2 9 16 23 30 7 20 27 4 11 18 25 1
(because “too much” volume
August September October N
can set up a reversal).
NASDAQ Advancing Volume Ratio 0.9
0.8
0.7 The NYSE bullish level
0.6 is .2; bearish level is .8
0.5
0.4
0.3
The Nasdaq bullish level
0.2
is .2; bearish level is .8
0.1

August September October Novembe 29

 Market Breadth Analysis
NYSE 10-Day Advancing Volume Ratio NASDAQ 10-Day Advancing Volume Ratio
0.65 0.65
0.60 0.60

0.55 0.55

0.50 0.50

0.45
0.45
0.40
0.40
0.35
0.35

NYSE 21-Day Advancing Volume Ratio NASDAQ 21-Day Advancing Volume Ratio
0.60 0.60

0.55
0.55

0.50
0.50

0.45
0.45
0.40
0.40

Nov Dec 2004 Mar Apr May Jun Jul Aug Sep Oct No Nov Dec 2004 Mar Apr May Jun Jul Aug Sep Oct No

The 10-day MA the prior two weeks; the 21-day MA the prior four weeks
NYSE AVR 10-day bullish levels are .40 to Nasdaq AVR 10-day bullish levels are .35 to
.45; bearish levels are .60 to .65. .40; bearish levels are .60 to .65.
NYSE AVR 21-day bullish levels are .40 to Nasdaq AVR 21-day bullish levels are .45 to
.45; bearish levels are .55 to .60 .40; bearish levels are .55 to .60 30
 Market Breadth Analysis
S&P 500 Overbought readings during a bear 1150
1100
1050
market are more reliable and tend to 1000
950
make V-tops like (A). A Basing top like 900
at
850

(B), are more common in bull markets. 800

750
Divergence
10-Day Advancing Volume Ratio 0.70
0.65
(A) The new high extreme that occurred 0.60
at
0.55
0.50
(C), was the first sign that a market 0.45
0.40
Sharp fast move bottom may be near. 0.35

between extremes 0.30

21-Day Advancing Volume Ratio (B)
0.60
NH Extreme (C)
Basing
Divergences, speed of move between 0.55
0.50
extremes, and the patterns that form at
0.45

extremes, must all be used to make an 0.40

Divergence
assessment of market probabilities. 0.35
Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Mar Apr May Jun Jul Aug 3131
 Market Breadth Analysis
2200

NASDAQ 2100
2000
1900
1800
1700
1600
1500
Strong bull markets may not produce 10- or 21-day 1400
oversold readings and prior lows may provide a level to use. 1300
1200
1100

Overbought readings resulted in minor pullbacks,

which are tradable for short-term traders. 0.70
0.65
0.60
0.55
0.50
0.45
Prior Lows 0.40
0.35
0.30

10-Day Advancing Volume Ratio 0.65

0.60

0.55

0.50

0.45

0.40
21-Day Advancing Volume Ratio
Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun Jul Aug 32
 Market Breadth Analysis
TRIN Indicator - (Advancing Stocks / Declining Stocks) / (Advancing Volume / Declining Volume)

When more volume is associated with advancers (bullish) than declining stocks (bearish), TRIN
will be less than 1.0; if more volume is associated with decliners, TRIN will be greater than 1.0.

Because of its calculation method, the TRIN has an inverse relationship with the market. Some
programs allow the scale to be inverted, which shows rising TRIN moving lower with the market .

A rising TRIN is bearish and a falling TRIN is bullish, until they hit extremes.

Examples of TRIN calculations: Ex. 1 Ex. 2 Ex. 3 Ex. 4

Advancers 1600 1600 1600 1200
Decliners 800 800 1200 1600
Advance/Decline Ratio 2 2 1.33 0.75
Advancing Volume 60000 30000 40000 40000
Declining Volume 20000 25000 38000 38000
Advancing Volume/Declining Volume Ratio 3 1.2 1.2 1.2

TRIN 2 / 3 = .66 2 / 1.2 = 1.66 1.33 / 1.2 = 1.26 .75 / 1.2 = .625
Bullish Bearish Bearish Bullish
33
 Market Breadth Analysis
NYSE Daily TRIN (Inverted)
0.5 The daily TRIN’s day-to-day
1.0
extremes can indicate a reversal.
1.5
The NYSE bullish level is 2.0;
2.0
bearish level is .5
2.5

3.0
The Nasdaq bullish level is 2.0;
bearish level is .5
2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Nasdaq Daily TRIN (Inverted) 0.0

A high closing TRIN between
0.5
1.0 1.5 – 2.0 after a steady sell off
1.5 into the close can set up short-
2.0
2.5
term longs for active traders.
3.0
3.5

2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 34
 Market Breadth Analysis
(Scales Inverted) 0.6 0.5
0.7 0.6
0.8
0.7
0.9
0.8
1.0
1.1 0.9
1.2 1.0
1.3 1.1

5-MA of the TRIN 5-MA of the TRIN

0.6 0.5
0.7 0.6
0.8 0.7
0.9 0.8
1.0 0.9
1.1 1.0
1.2
1.1

ar 10-MA
Apr MayofJun
theJulTRIN
Aug Sep Oct Nov Dec 2000 Mar A Oct Nov Dec 1990 Feb Mar 10-MA
Apr of the
May Jun TRIN
Jul

TRIN’S extreme levels change depending on

1.0 the market environment.
1.5

5-MA of the TRIN

In bull markets, overbought levels will reach
lower extremes, vice versa for a bear market.
1.0
For that reason, a 20% and 30% envelope will
1.5
be used around a 50-period MA of the 5- and 10-
10-MA of the TRIN
May Jun Jul Aug Sep Oct Nov Dec 2001 Feb Mar
day MA of the TRIN as a guide for extremes. 35
 Understanding Envelopes
Percentage envelopes around a moving
average trend with prices, as well as provide
extremes based on historical price movements

%
%

MA
%

36
 Market Breadth Analysis
5-MA of the NYSE TRIN (Inverted) 0.6
0.7
0.8
0.9 A 5- and 10-day MA of the TRIN is
1.0

(A) 1.1
1.2
1.3
used for market timing.
1.4
1.5
1.6

+BD 10-MA of the NYSE TRIN (Inverted) 0.6 Strong price trends like the one that
0.7
0.8
0.9 began at the end of 1998 often begin
1.0
(A) 1.1
with an explosive upward (inverted) (A)
1.2
1.3
1.4 move in the TRIN (Vol. into up stocks).
Sharp fast move 1.5

+BD between extremes

S&P 500 1400
1350
1300 The 10-MA thereafter never reached
1250
1200
1150
an oversold extreme level, requiring us
LTCM 1100
1050 to use the shorter 5-MA for signals.
1000
+BD 950

August September November 1999 February April May Jun 37

 Market Breadth Analysis
NH 0.5
5-MA TRIN (Inverted) -BD The oversold signal at (A)
1.0
only produced a mild bounce.

1.5
The failure of the TRIN to
(A) +BD
move to overbought after A
Extreme low on breakdown (B) +BD
(C) 10-MA on bounces, indicated low
-BD TRIN 0.7
0.8 volume in advancers.
0.9
1.0
1.1
1.2
1.3
The –BD that preceded the
1.4
1.5 breakdown at (B), warned of
(A) 1.6
1.7 internal weakness.
+BD
(B) 2150
-BD (C) Nasdaq 2100
The new low TRIN
2050
2000 confirmed the breakdown.
1950
(A) 1900
+BD 1850
1800 The +BD at (C) suggested
+BD
Breakdown 1750
a near-term low.
2004 February April May June July August September Nove 38
 Market Breadth Analysis
-BD 5-MA TRIN (D) NH extreme At (A), the –BD and
1.0
TRIN’s new low extreme,
(A) 1.5
confirmed the breakdown.

NL extreme +BD At (B), +BD in the 5-

(B) +BD
10-MA TRIN
(C) MA TRIN, indicated less
0.7

-BD
(D) 0.9 volume into decliners.
0.8

1.0
1.1
1.2
1.3
1.4
At (C), the TRIN's +BD
1.5
1.6 indicated less volume
1.7

NL extreme +BD(C)
1.8
associated with decliners,
1160 even though the S&P had
-BD S&P 500
1150
1140 moved lower.
1130
1120
1110
1100 At (D), speed to an
(A) 1090
(B) 1080 extreme, confirmed higher
1070
+BD
(C) 1060
prices to come!
2004 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 39
 Market Breadth Analysis
New High - New Low Histogram – (New Highs - New Lows)
The value of the New High-New Low (NH-NL) Histogram is when it shows divergences
between it and market indices. Initial extremes typically do not suggest a market high or low.
NH-NL does not oscillate, and changes slower than other internal indicators.
Divergences over longer periods of time can signal change is ahead.
This indicator is best used with its raw data, rather than smoothing it with a moving
average. Smoothing can eliminate the divergences, making this internal ineffectual.
New High-New Low
52-Week Highs minus 52-Week Lows equals Histogram
0 200
200 10
11
20 150
161 150
30
150 40
50 100
60
70 50
100 80
90 0
100
50 110 -50
120
130 -100
0
June July August Septembe June July August Septembe June July August Septemb 40
 Market Breadth Analysis
S&P 500 1600
1500
1400

1300

1200

1100

1000

900
+BD When the number of NH-NL is not NH-NL bullish 800
confirming the index it provides an confirmation in 2003
early warning. +BD
500

(A) -500

At (A), although NH-NL was improving in +BD

2000 while prices advanced, they were still In a downtrend, this is the -1000
+BD negative, another warning of the Tech Bubble!
type of +BD to look for.
1999 2000 2001 2002 2003 2004 41
 Market Breadth Analysis

New High Ratio - New Highs / (New Highs + New Lows)

The New High Ratio calculates the number of stocks making new highs as a
percentage of total new highs plus new lows. This does not consider how many
stocks closed unchanged on the day.

We will use a 10-day MA of the Ratio to smooth the day-to-day ratio. This length
of smoothing provides an intermediate-term measure.
New Highs divided by New Highs + New Lows equals New High Ratio
.93605%
200
0.9
161 200
0.8
172
150 0.7
0.6
150
0.5
100
0.4

100 0.3
50 0.2
0.1

0 50 0.0
June July August Septembe y June July August Septembe y June July August Septemb 42
 Market Breadth Analysis
The overbought area for the S&P 500 and the Nasdaq is .80 to .90. The oversold
area for both is .20 to .10. The basing at high levels in 2003 showed strength.
Note trading opportunities and divergences at points A, B, C, D, E and F.
This internal works well as a intermediate-term indicator.

S&P 500 & 10-Day 1350

Nasdaq & 10-Day 2100
1300 2000
NYSE NH Ratio 1250 Nasdaq NH Ratio 1900
1800
1200
1700
1150 1600
1100 1500
1050 1400
A 1000 1300

C
950
900
F 1200
1100
1000
850
800 D 900

750 E 800

1.05
B 1.05
1.00
0.95
F 1.00
0.95
0.90
0.90 0.85
0.85 0.80
0.80
0.75
0.75
0.70
0.70
0.65
A 0.65
0.60
0.55
0.60
0.55
0.50
0.50
0.45
0.45
0.40 0.40
0.35 0.35
0.30 0.30
0.25 0.25
0.20 0.20
0.15 0.15
0.10 0.10
B C 0.05 D E
0.05
0.00
2002 2003 2004 2002 2003 2004 43
 Market Breadth Analysis
NYSE ADV. ISSUES RATIO NASDAQ ADV. ISSUES RATIO EQUITY P/C RATIO
0.8 0.9
0.8 1.2
0.7
0.7 1.1
0.6 0.6 1.0
0.5 0.5 0.9
0.4 0.4 0.8
0.3 0.3 0.7
0.2 0.6
0.2
0.1
26 2 9 16 23 30 7 13 20 26 2 9 16 23 30 7 13 20
Nightly
26 2 9
August analysis
16 23 30 7
begins
13
September
20
with theAugust
raw daily closes
Septemberto see if they
Augustare in alignment.
September

NYSE ADV. VOLUME RATIO NASDAQ ADV. VOLUME RATIO TOTAL P/C RATIO
0.9
0.8 1.3
0.6 0.7 1.2
0.6 1.1
0.5 0.5 1.0
0.4 0.4 0.9
0.3 0.8
0.3 0.2 0.7
0.2 0.1
26 2 9 16 23 30 7 13 20 26 2 9 16 23 30 7 13 20 26 2 9 16 23 30 7 13 20
If they are, it suggests a short-term
August September August market reversal in the
September next 1 - 3September
August days.
NYSE TRIN NAZDAQ TRIN OEX P/C RATIO
0.5 0.5
1.0 1.0 1.5
1.5
1.5
2.0
2.0 2.5 1.0
2.5 3.0
3.0 3.5

26 2 9 16 23 30 7 13 20 26 2 9 16 23 30 7 13 20 26 2 9 16 23 30 7 13 20
August September August September August September 45
 Market Breadth Analysis & S&P 500
TRIN (Inverse) McClellan Oscillator S&P 500
1150
300
1.0 Basing 1140
200 1130
1.5
100 1120
0 1110
1100
-100 1090
1
-200 1080
Speed -300 Breakdown 1070
1060
-400
May Jun Jul Aug Sep May June July August Septem May Jun Jul Aug Sep

Advancing Volume Ratios Advancing Stocks Ratio

Basing The August low showed
0.6
0.5
0.55 many bullish divergences,
0.4
Speed which suggested taking a
0.50

0.45
long position, and was
0.55
0.50 confirmed by price.
0.45 0.40
0.40
May Jun Jul Aug Sep
Although the internals
May Jun Jul Aug Sep
New Highs – New Lows New Highs Ratio reached high levels in Sep.
200 0.9
100
0
0.8 and a pullback was likely,
-100 0.7
-200 0.6
the speed at which they
-300
-400
Speed 0.5
reached those levels, as
-500 0.4
-600 0.3 well as the fact that the
-700 0.2
-800 0.1
shorter-term internals were
May Jun Jul Aug Sep May Jun Jul Aug Sep basing, indicated strength.46
 Market Breadth Analysis & S&P 500
TRIN McClellan Oscillator 200 S&P 500 1200
1.0
150

1.5 100
1150
50
0
-50
1 1100
-100
-150
-200

Aug Sep Oct Nov Dec

Aug Sep Oct Nov Dec y August September November
Advancing Volume Ratios Advancing Stocks Ratio
0.60
0.65
0.60
A correction brought the
0.55
0.50 0.55 short-term internals to
0.45
0.40
0.50
oversold levels, which occurred
0.60
0.55
at the seasonal October low.
0.50 0.45
0.45
0.40
The New Highs-New Lows
Aug Sep Oct Nov Dec
Aug Sep Oct Nov Dec and the New Highs Ratio
New Highs – New Lows New Highs Ratio
0.9 confirmed the NOV. new high
450
400
350
0.8 in the S&P 500.
300
250 0.7
200
150
100
0.6 In mid December 2004,
50 0.5
0
0.4
short-term breath internals
-50
-100 0.3 were moving lower while the

Aug Sep Oct Nov Dec Aug Sep Oct Nov Dec S&P moved sideways. 47
 Market Breadth Analysis & NASDAQ
TRIN (Inverse) McClellan Oscillator Nasdaq
1.0 150 2050
1.5 100
2000
50
Basing 0
1950

Speed -50 1900

1 -100 1850
-150
1800
-200
1750
May Jun Jul Aug Sep May June July August Septem
May Jun Jul Aug Sep
Advancing Volume Ratios Advancing Stocks Ratio 0.55
0.6 The August low did Not
0.5
show unified divergences,
0.4 0.50
but all internals were at
0.55 extreme bullish levels.
0.50 0.45
0.45 Although most Nasdaq
May Jun Jul Aug Sep May Jun Jul Aug Sep
internals were at high
New Highs – New Lows New Highs Ratio levels by late August, the
100
50 0.8 McClellan based while the
0 0.7
index moved sideways.
-50 0.6
-100 0.5 Internals correcting
-150 0.4
-200 0.3
while the market moves
-250 0.2 sideways is bullish.
May Jun Jul Aug Sep
r May Jun Jul Aug Sep
48
 Market Breadth Analysis & NASDAQ
TRIN (Inverse) 0.5 McClellan Oscillator
150
Nasdaq 2150
1.0
2100
100
1.5 2050
50
2000
0
1950
-50
1 1900
-100
1850
-150
1800
-200
Aug Sep Oct Nov Dec 1750
Aug Sep Oct Nov Dec
Advancing Volume Ratios Advancing Stocks Ratio Aug Sep Oct Nov Dec
0.60 0.55
0.55
0.50 By early December, most
0.45
0.40
0.35
0.50 of the breadth internals were
0.60 bullish, despite overbought.
0.55
0.45
0.50
0.45 Internals were basing at
Aug Sep Oct Nov Dec
Aug Sep Oct Nov Dec high levels or trending
New Highs – New Lows 300 New Highs Ratio 0.9 higher, but there were signs
250
0.8
200
150 0.7
to pay attention to. Can you
100
50
0.6 see them?
0 0.5
-50
-100
0.4
Is the uptrend still intact?
-150 0.3
-200
-250
0.2 What is your trading bias
Aug Sep Oct Nov Dec Aug Sep Oct Nov Dec based on this information? 49
 Market Breadth Analysis

Internals did Not

S&P 500 confirm the breakdown

August 2004 breakdown

50
 Market Internals Analysis
9/21/01: Liquidate All or Prudent Buying Opportunity?

NAS TRIN > 9.16 !

McClellan -316 !

TICK < 3,655 !

Bullish
Divergence
VXN > 91.8 !
NASDAQ
down 14 days
and gap down!

By week’s end, the Dow -14.3%, S&P 500, -11.6%,

and NASDAQ -16.1%, and Transports -23.2%!
5151
 Market Internals Analysis
9/21/01: Liquidate All or Prudent Buying Opportunity?
On 9/21/01 the McClellan Oscillator was at -316.
By 10/04/01 it was overbought at 141
By 10/11/01 it moved straight up to an
overbought extreme level of +205!

10/11/01

10/04/01

Obviously, overbought
does not mean sell!

9/21/01
52
53
 Concluding Thoughts

Market Internals provide an objective comparison between the

current market environment and the past based on historical extremes.

Market Internal gauges should be read in combination with each

other. One gauge alone may be misleading.

Market Internals guide our bias – Bullish – Bearish – Neutral. This

stops us from projecting our own bias that may be based on wishes, fear
or greed at the moment.

While price is King and what we trade. Consider Market Internals as

the Queen, and as we know, the Queen often controls the King!
54
 Concluding Thoughts

Markets do not turn on a dime when internals reach extremes.

Overbought or oversold may Not mean changing your bias immediately.

A rapid move from one extreme to another (speed) during a breakout

or breakdown confirms the price action.

Internals tend to make V-tops in bear markets and Rounding tops in

bull markets. Bottoms typically form with divergences in both markets.

Bottoms have always been easier to pinpoint than tops.

55
 Concluding Thoughts

Breadth Indicators are excellent market timing tools, particularly

when many are in alignment. Long- and short-term.

Price is ultimately the reason before making any trading decision..

Internals lead price turning points.

Sentiment indicators, which we cover in part-two of this series will

increase the accuracy of breadth internals.
56
 Concluding Thoughts

A solid foundation of market breadth and sentiment indicators will increase

your odds and confidence in trading

You can interpret comments by the media regarding breadth and sentiment
with the confidence that you know what is pertinent and what is noise

Your understanding of this information, coupled with the other components

of The Pristine Method®, empowers you to be objective and self-reliant

Get the pertinent data to setup and interpret in a routine manner based on
your time frame and Trading Plan (www.pinnacledata.com)
57
 Concluding Thoughts
At this point, you have the pertinent information that makes
breadth internals valuable. It’s up to you to work with the material
and now make it yours, with your own trading style.

With this information on breadth internals, you don’t need to be

reliant on any market analyst in order to come to your own
objective conclusions about market timing.

Define an opportunity where the odds are in your favor, then have
the discipline to follow your trading and money management rules.

In closing, we at Pristine wish you great success!

58