QuickOverview

Is the stock market headed up or down the rest of the day? Intraday headlines about the stock markets always contain how much each market is up or down for that given day. That is a good snapshot of what has happened, but does not tell traders much about what will still happen later in the day. In order to try to predict future direction, traders will need to look into the market internals for that given day. Market internals generally involves examining for a given period the volume of trades, a comparison of stocks going higher and lower, and stocks reaching their yearly highs and lows.

Though market internals are most often cited by traders, market internals for multiple days can be applied to predict longer term trends as well. Note that this article is general in its discussion of stock markets. However, the concepts discussed here apply to any stock market or sub-market index including the Dow Jones Industrial Average, the Standard & Poors 500 (S&P 500) and the Nasdaq Composite Index.

Basic Market Internal Indicators

Trading volume as compared to previous days is a good indicator of the conviction of a day's trading activity. If the market is down or up on relatively light volume, it is more likely to reverse its direction based on moderately important news or simply more trading activity. On the other hand, a market's move on heavy trading volume has more momentum and is less likely to be reversed.

The Advance / Decline Line is also used to judge the conviction of the market's level. A market that is moving up with a large number of advancing stocks as compared to losing stocks is more likely to continue that trend than one with a roughly equal number of advancing and declining stocks. The reverse is also true for a market moving down continuing its trend when declining issues overwhelm advancing issues. A variation to the Advance / Decline line is the comparison of new 52 week highs versus new 52 week lows. As one would imagine, 52 week highs can be used in place of advancing issues and 52 week lows in place of declining issues to reach the same conclusions. For short term trading, advancing and declining issues are a more effective measure, while 52 week highs and lows is more useful for intermediate and longer term trading.

Moving Averages

As with individual stocks, traders like to look at a market's position relative to a moving average of prices for a given number of prior periods. Technically, moving averages are not really market internals. However, this discussion is in this article because they are often used for the same purpose as market internals. For frequent traders, the length of the period can be as short as 1 minute, though that is generally thought of too short. However, many traders use a moving average with periods defined as short as 20 measures in 5 or 10 minute intervals. Longer term traders often use 20 day, 50 day, and 100 day moving averages.

The theory is that the moving averages offer a resistance for the direction of the market. So when a market slows its movement right before reaching the value of a given moving average, it will possibly reverse direction before actually matching that value. If you visualize the market price and moving averages as lines on a chart, the market seems to “bounce” off the moving average.

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