Decoding Market Internals: A Guide to Steenbarger's Use of TICK, ADD, and VOLD

Understanding Market Internals

Market internals are a set of indicators that provide a broad view of the overall health and sentiment of the stock market. Unlike price-based indicators that focus on individual stocks, market internals measure the collective activity of all stocks on an exchange. Dr. Brett Steenbarger is a proponent of using market internals to gain a short-term edge, particularly for intraday trading.

Steenbarger's Key Market Internal Indicators

Steenbarger focuses on three primary market internal indicators:

• TICK ($TICK): The TICK index represents the net number of stocks on the New York Stock Exchange (NYSE) that are trading on an uptick versus a downtick. A positive TICK reading indicates that more stocks are trading up, suggesting bullish sentiment, while a negative reading suggests bearish sentiment. Steenbarger uses TICK to gauge the immediate buying and selling pressure in the market.
• Advance/Decline Line (ADD): The Advance/Decline Line is a cumulative measure of the number of advancing stocks minus the number of declining stocks. A rising A/D line indicates that more stocks are participating in the market's advance, which is a sign of a healthy trend. Conversely, a falling A/D line can signal a weakening trend.
• Volume Difference (VOLD): VOLD is the difference between the volume of advancing stocks and the volume of declining stocks. A positive VOLD reading indicates that there is more volume behind the advancing stocks, which is a bullish sign. A negative VOLD reading suggests that the declining stocks have more conviction.

Trading Strategies Using Market Internals

Steenbarger uses these indicators in combination to identify high-probability trading setups. Here are a few examples:

• Fading Extreme TICK Readings: When the TICK index reaches an extreme level (e.g., +1000 or -1000), it can signal a short-term exhaustion of buying or selling pressure. Steenbarger looks for opportunities to fade these extremes, especially when they are not confirmed by other indicators.
• Divergences between Price and Market Internals: A divergence occurs when the price of an index is making a new high, but the market internals are not confirming the move. For example, if the S&P 500 is making a new high, but the A/D line is making a lower high, it could be a sign that the rally is losing momentum and a reversal is imminent.
• Confirmation of Breakouts: Steenbarger uses market internals to confirm the validity of breakouts. If a stock breaks out to a new high on strong volume and is accompanied by a rising A/D line and positive VOLD, it increases the probability that the breakout will be successful.