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The Key Market Internals

01/26/2013 8:00 am EST


Linda Raschke

President, LBRGroup, Inc.

Trader Linda Raschke discusses the various measures of the stock market's internal health that she uses to help her determine the bias for her trading early in the day.

My guest today is Linda Raschke and we’re talking about market internals and the things that she monitors during the day to help her make good trading decisions, so Linda talk about these market internals.  What do you like to look at?

The very number one criteria I look at is volume and I will usually look at the first 30-minute volume for the New York Stock Exchange volume that serves as good of a proxy as anything, even though the bulk of the shares aren’t traded on the NYSE anymore, so the volume sets the tone for is there going to be a day where we can have range expansion or better trend or movement, or if it’s a light volume day is it going to be more of a rotation contraction day.  That is going to give me the context for how I put the other indicators into frame work. 

Obviously breadth is very important.  If you’re going to have a strong trend during the day you’ll usually have some type of extreme breadth reading, and with that people need to be careful in terms of looking at if we have a large opening gap, which we have a lot of large opening gaps nowadays, of course the breadth will show some extreme readings.  So, don’t look at the breadth reading in the first five or ten minutes to make an assessment.  Instead let 25 minutes pass and then look at is there a trend in the markets breadth.  Is it deteriorating or is it getting better, and that’s the most important thing is the trend of the breadth. 

The second indicator that I like the best is the RVX.  VIX as well is a popular indicator.  This represents the implied volatility on the options.  It helps smooth the trends, so there is a pretty strong correlation that if the VIX is increasing, they’re buying puts, they’re trying to buy protection and usually that will happen in a down-trending market.  I used to look at trend a lot.  I still look at trend.  Trend is a ratio of the up-volume, down-volume, and the advancing minus declining issues, and that also will tell you if there is strong buying power.  For example, if I see the trend, the New York Stock Exchange trend, around 60 or lower it’s saying that there is mostly buying pressure out there and to only look to trade in the direction of the long side.  Probably in the last three to four years you needed to be a little bit more comfortable with the trend just to make sure that there wasn’t one very low-priced, high-volume stock that was distorting it a little bit.  So far we’ve touched upon volume number one for putting things in context, breadth, the RVX, and the trend. 

RVX.  You did mention the RVX.  What is the RVX?

Okay, VIX is probably the most common known one and those are the implied volatility on the near-term options for the big cap index.  RVX is the implied volatility on the near-term options for the Russell.  That represents the broad market.  The broad market, you know there is an old saying that if the generals are advancing by themselves they’re not going to get very far.  They need to have the army behind them, so if you have market leadership like IBM (IBM) and Microsoft (MSFT) and Apple (AAPL) and General Electric (GE), you really need to have the broad market and those strong breadth readings to support that, otherwise the most are probably not going to carry very far. 

And you’ll generally trade only in the direction that you see all these things flowing, even if you’ve got a chart setup that would tell you that it’s time to go the opposite direction, it would give you pause, basically, if you see these things.

Well I’ll look, for example, if the RVX is declining. I will look for it to stop going down, so that’s the way that I think about it.  I want to see that it’s stopped going up or it stopped going down so that really there is a little shift of momentum on the swing that’s going down.  There is a shift of momentum that it can start to turn back up in the other direction, so just to the classic of dodge; you don’t want to be trying to catch a falling knife.  You know I’m not trying to bottom fish, but with that said, that’s the importance of looking at volume.  If it’s a light volume day I will be a lot more aggressive about making countertrend trades.  Why?  Because there’s not that higher time frame player, meaning the institutions or the strong funds with the strong money flows that are going to keep a sustainable trend. 

That’s why volume is so important to put some of these indicators in context.  Lastly, I will give you a perfect example; the TICKS.  That’s the number of stocks on an uptick or the number of stocks on a downtick.  If it’s a light volume day TICKS very often will march the extreme of the move.  You know you have the buy programs and that’s it.  The party’s over, and that’s a very good indication to exit your positions.  If you get a high-TICK reading, take your profits.  However, if you’ve got a good volume day, you want to use the TICKS as a momentum indicator.  In other words, that represents the program boys are there, the players are around, you’ve got the buy programs.  If you see strong TICK readings in one direction you want to sit there and say, okay, I will look to enter on the reaction back in the direction of that trend.  Those are the main ones that I use.

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