Market Internals Take the Pulse of the Stock Market

Traders vote on stock market direction with their dollars

Stock Market
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It's always important to understand the way the market is trending and to try to anticipate if a change is coming if you're going to invest. Traders regularly look for opportunities through following trends or when the market reverses direction.

Unfortunately, there are no real surefire direct signs that will unequivocally tell you what the market is going to do, but this isn't to say that you can't get a feeling for coming changes. You can get a good idea of upcoming trends by watching the flow of money into and out of the market.

Yes, it's a little like rolling the dice, but as you get better at it, the process becomes more reliable. The idea is that if more money is going into the market (buyers) than is coming out (sellers), you can generally expect prices to continue rising. Here are some general rules of thumb.

What Money Flow Means in the Stock Market

Money flow in the stock market is either negative or positive in any given day. Technically, it's arrived at by averaging prices then multiplying the average by the daily volume. Do the same thing the next day and compare the resulting numbers. This will tell you whether the flow for the day was positive or negative.

A positive flow also means a given stock was purchased at a higher price, and likewise, a negative flow indicates that the next trade was made at a lower price. These actions are also referred to as upticks and downticks. When more stocks are traded on upticks, the overall flow for the day is considered to be positive, and vice versa. 

Market Internals and What They Mean

Market internals are a group of indicators that traders use to calculate market direction. These measures look at the New York Stock Exchange and Nasdaq, and they measure, in one form or the other, how traders are voting with their dollars. If more money is flowing out, it means investors are selling, and you can typically expect prices to fall. If more money is flowing in, it means investors are buying, and you can usually expect prices to rise. A change in either of these flows indicates that the market may be ready to reverse itself.

Commonly Used Indicators

Five of the most commonly used indicators are the TRIN, TRIN/Q, TICK, TIKI and VIX. Each one of these measures a form of money flowing into and out of the market in either the NYSE or Nasdaq. You'll want to follow how each is changing over time. This change is your clue about market direction.

The Bottom Line

Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice, and it is not intended as investment advice.