Section 5 - Chapter 2 - Market Internals

Chapter 2 – Market Internals
Section 5 – Trend Analysis
Presented By :
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Agenda
 Examine basic indicators such as the advance-
decline line and up and down volume
 Describe various breadth indicators
 Explain how breadth indicators are commonly used
 Contrast different ways to calculate and use
leadership indicators
 Interpret several advanced indicators
 Examine ways of using qualitative analysis when
examining market internals

Advance-Decline Line (A/D Line) Analysis
Key Takeaways
Definition:
• The Advance-Decline Line (A/D Line) is a breadth indicator that measures market
participation by tracking the difference between advancing and declining stocks.
• It helps assess the overall strength or weakness of a market trend.
Formula:
A/D value Line = (Advancing Stocks - Declining Stocks) + Previous A/D Value
Interpretation:
Rising A/D Line → Broad market participation, confirming an uptrend.
Falling A/D Line → Weakening market breadth, warning of a potential downtrend.
Divergence with Index → A warning signal for possible trend reversals.

Cheat Sheet: Advance-Decline Line Interpretation
A/D Line Trend Index Trend Market Signal Interpretation
Rising Rising Bullish Confirmation Strong market participation
Falling Rising Bearish Divergence
Fewer stocks supporting the
rally, possible reversal
Rising Falling Bullish Divergence
Market decline losing
momentum, possible reversal
Falling Falling Bearish Confirmation
Broad market weakness,
continued downtrend

Trading Strategies Using A/D Line
1. Confirming Market Trends
Strategy: Trade in the direction of the A/D Line.
Example: If the S&P 500 is rising and the A/D Line is rising, the uptrend is strong → Go Long on
stocks.
2. Spotting Divergences for Reversals
•Strategy: Look for divergences between the A/D Line and the market index.
Example:
 If the S&P 500 is making new highs but the A/D Line is declining, the rally may be weak → Prepare
for a possible market reversal.
 If the S&P 500 is making new lows but the A/D Line is rising, a bottom may be forming → Look for
buying opportunities.

Trading Strategies Using A/D Line
3. Confirming Breakouts & Breakdowns
Strategy: Use the A/D Line to validate price breakouts or breakdowns.
Example:
If a stock index breaks above resistance and the A/D Line is rising, the breakout is valid →
Go Long.
If a stock index breaks below support and the A/D Line is falling, the breakdown is valid
→ Short the market.
4. Identifying Weak Market Rallies
Strategy: Watch for weak rallies when price moves up, but the A/D Line lags.
Example: If the NASDAQ 100 is rising on low participation, indicated by a weak A/D Line, it
suggests a fragile uptrend → Avoid chasing trades.

Up and Down Volume Analysis
1. Definition:
Up Volume: Total volume on days when the price closes higher than the previous close.
Down Volume: Total volume on days when the price closes lower than the previous close.
It helps measure buying vs. selling pressure in the market.
2. Why It Matters:
Increasing Up Volume → Strong buying pressure, confirming an uptrend.
Increasing Down Volume → Strong selling pressure, confirming a downtrend.
Divergences between price and volume can indicate trend reversals.

Up and Down Volume Analysis
3. Key Indicators Using Up/Down Volume:
Up/Down Volume Ratio (U/D Ratio): U/D Ratio=∑UpVolume/ ∑DownVolume
Above 1 → Bullish sentiment (buying pressure).
Below 1 → Bearish sentiment (selling pressure).
On-Balance Volume (OBV):Rising OBV → Buying pressure (bullish).
Falling OBV → Selling pressure (bearish).
Volume Accumulation Percentage: Measures the proportion of up/down volume over time.

Cheat Sheet : Up and Down Volume Analysis
Volume Trend Price Trend Market Signal Interpretation
Up Volume ↑ Price ↑ Bullish Confirmation
Strong uptrend with buyer
participation
Up Volume ↓ Price ↑ Bearish Divergence
Weak rally, potential
reversal
Down Volume ↑ Price ↓ Bearish Confirmation
Strong downtrend with
selling pressure
Down Volume ↓ Price ↓ Bullish Divergence
Weak downtrend, possible
bottom
Up Volume > Down
Volume
Price sideways Accumulation Phase
Potential breakout if up
volume increases
Down Volume > Up
Volume
Price sideways Distribution Phase
Potential breakdown if
down volume increases

Trading Strategies Using Up and Down Volume
1. Confirming Trend Strength
Strategy: Trade in the direction of volume confirmation.
Example:
o If price is rising and Up Volume is increasing, the uptrend is strong → Go Long.
o If price is falling and Down Volume is increasing, the downtrend is strong →
Short the market.

2. Spotting Trend Reversals Using Divergences
Strategy: Look for price-volume divergence.
Example:
If price is making new highs but Up Volume is decreasing, fewer buyers are
supporting the move → Prepare for a pullback or reversal.
If price is making new lows but Down Volume is decreasing, selling pressure is
weakening → Look for buying opportunities.

3. Using Up/Down Volume for Breakout Confirmation
Strategy: Use volume spikes to validate breakouts.
Example:
If a stock breaks above resistance on high Up Volume, the breakout is strong
→ Go Long.
If a stock breaks below support on high Down Volume, the breakdown is
strong → Short the stock.

4. Identifying Distribution vs. Accumulation
Strategy: Observe volume behavior in sideways markets.
Example:
If a stock is moving sideways but Up Volume is consistently higher than Down
Volume, smart money is accumulating → Prepare for an upside breakout.
If Down Volume is consistently higher than Up Volume, institutions may be
distributing → Prepare for a downside breakdown.

Absolute Breadth Index (ABI) Analysis
Key Takeaways
1. Definition:
o The Absolute Breadth Index (ABI) is a market volatility indicator that
measures the level of stock market movement, regardless of direction.
o It calculates the absolute difference between advancing and declining
stocks.
2. Formula:
ABI = Advancing Stocks − Declining Stocks∣
o Higher ABI values → Increased market volatility.
o Lower ABI values → Reduced market volatility, suggesting consolidation.

3. Why It Matters:
ABI does not indicate trend direction, only volatility.
Rising ABI suggests strong market moves, often preceding breakouts.
Falling ABI suggests a calm or range-bound market.

ABI Value Market Condition Interpretation
High ABI Increased volatility
Expect strong price movements in
either direction
Low ABI Decreased volatility
Market is in consolidation or range-
bound
Rising ABI Volatility increasing Possible breakout approaching
Falling ABI Volatility decreasing Possible sideways movement
High ABI + Price Up Bullish momentum Possible trend continuation
High ABI + Price Down Bearish momentum Possible strong downtrend

Trading Strategies Using ABI
1. Predicting Breakouts
Strategy: Look for a spike in ABI, signaling increased market
participation.
• Example:
If ABI surges after a low-volatility period, expect a breakout in either
direction → Use technical confirmation (trendlines, volume) before
trading.

Strategy: If ABI remains high while price moves in one direction, it confirms
the trend.
Example:
If ABI is high and the market is rallying, strong bullish momentum → Go Long.
If ABI is high and the market is falling, strong bearish momentum → Short the
market.

3. Identifying Low-Volatility Accumulation Phases
Strategy:
A period of low ABI suggests a range-bound market before a potential
breakout.
Example:
If ABI is low for several days/weeks, prepare for a trend move when ABI
increases.

4. Trading ABI Spikes with Trend Confirmation
Strategy: Combine ABI spikes with trend indicators like Moving Averages,
RSI, or MACD.
Example:
o If ABI spikes and price breaks above a key resistance level, it’s a bullish
breakout → Enter Long.
o If ABI spikes and price breaks below support, it’s a bearish breakdown →
Enter Short.

Advance/Decline Ratio (A/D Ratio) Analysis
Key Takeaways
1. Definition:
The Advance/Decline Ratio (A/D Ratio) measures market breadth by
comparing the number of advancing stocks to declining stocks.
It helps gauge overall market strength or weakness.
2. Formula:
A/D Ratio=Advancing Stocks/Declining Stocks
A/D Ratio > 1 → More advancing stocks (bullish market sentiment).
A/D Ratio < 1 → More declining stocks (bearish market sentiment).

3. Why It Matters:
Shows the participation of stocks in a market move.
Can confirm or contradict index trends, signaling potential reversals.
Works well with other indicators like moving averages or RSI.

A/D Ratio Value Market Signal Interpretation
Above 1.5 Strong bullish trend
Many stocks are advancing,
market momentum is strong
Between 1.0 - 1.5 Mild bullish trend
Uptrend but with moderate
strength
Around 1.0 Neutral/sideways market
Advances and declines are
balanced
Between 0.5 - 1.0 Mild bearish trend
More stocks declining than
advancing
Below 0.5 Strong bearish trend
Market under pressure, strong
selling

Trading Strategies Using A/D Ratio
Strategy: Trade in the direction of a strong A/D Ratio trend.
Example:
If S&P 500 is rising and A/D Ratio is consistently above 1.5, market
strength is broad → Go Long on strong stocks.
If S&P 500 is falling and A/D Ratio is below 0.5, broad market
weakness → Short weak stocks.

2. Spotting Trend Reversals with Divergences
Strategy: Look for divergences between the A/D Ratio and the index
price trend.
Example:
If S&P 500 is making new highs but A/D Ratio is falling, fewer stocks
are driving the rally → Potential bearish reversal.
If S&P 500 is making new lows but A/D Ratio is rising, market
weakness is fading → Potential bullish reversal.

3. Using A/D Ratio for Breakout Confirmation
Strategy: Use a rising A/D Ratio to confirm breakouts.
Example:
If a stock index breaks above resistance with A/D Ratio > 1.5, it’s a
strong breakout → Go Long.
If a stock index breaks below support with A/D Ratio < 0.5, it’s a strong
breakdown → Short the market.

4. Identifying Weak Market Rallies
Strategy: Check A/D Ratio before entering trades in an uptrend.
Example:
If the market is rising but the A/D Ratio remains below 1.0, participation
is weak → Avoid chasing the rally.

80% and 90% Days Analysis
Key Takeaways
1. Definition:
 80% and 90% Days refer to extreme market breadth days where a high percentage
of total market volume and advancing/declining stocks move in one direction.
 80% Up Day: At least 80% of total market volume and advancing/declining stocks
are positive.
 80% Down Day: At least 80% of total market volume and advancing/declining
stocks are negative.
 90% Up/Down Days indicate even more extreme market conditions.

Key Takeaways
2. Why It Matters:
 These days signal strong market conviction—either overwhelming
buying or selling pressure.
 Clusters of 80% or 90% Down Days can indicate capitulation
(potential market bottoms).
 Clusters of 80% or 90% Up Days can confirm strong bullish trends
or overheated markets (potential reversals).

Market Event Market Signal Interpretation
Single 80% Up Day Bullish momentum
Indicates strong buying pressure but not always
trend-changing
Single 80% Down Day Bearish pressure
Suggests strong selling but may not confirm a
trend change
Back-to-Back 80% Up
Days
Bullish confirmation Strong sign of trend continuation
Back-to-Back 80% Down
Days
Bearish confirmation Market under heavy selling pressure
90% Up Day Extremely bullish High conviction rally, likely continuation
90% Down Day Capitulation selling
Often signals a near-term bottom, especially in
clusters
Cluster of 2+ 90% Down
Days
Possible reversal Indicates extreme pessimism, watch for rebound
Cluster of 2+ 90% Up Days Overbought market Possible overheating, watch for correction

Trading Strategies Using 80% and 90% Days
1. Identifying Market Bottoms (Capitulation Events)
Strategy: Look for clusters of 80% or 90% Down Days as signs of a potential
market bottom.
Example:
If the market has two or more consecutive 90% Down Days, selling may be
exhausted → Look for reversal signals and buying opportunities.

2. Confirming Bullish Momentum
Strategy: Trade with confidence after an 80% or 90% Up Day, especially after
a downtrend.
Example:
If the market forms a 90% Up Day after a correction, it confirms strong buying
interest → Go Long.

3. Spotting Overheated Markets for Profit-Taking
Strategy: A series of 90% Up Days in a short time can indicate an
overextended market.
Example:
If there are two or more 90% Up Days in a week, momentum may be too
extreme → Consider taking profits or hedging.

4. Trading Trend Continuation Signals
Strategy: Use back-to-back 80% Up Days to confirm strong uptrends.
• Example:
If the market rallies with two consecutive 80% Up Days, it suggests sustained
bullish strength → Look for buying opportunities in strong stocks.

Percentage of Stocks Above Their n-Day Average
Key Takeaways
1. Definition:
This indicator measures the percentage of stocks trading above their n-day
moving average (e.g., 50-day or 200-day).
It reflects market breadth, showing how many stocks participate in a trend.
2. Common n-Day Averages Used:
50-Day Average → Medium-term trend strength.
200-Day Average → Long-term trend strength (bull/bear market signal).

Percentage of Stocks Above Their n-Day Average
Key Takeaways
3. Why It Matters:
High values → Strong market participation, but extreme highs can signal
overbought conditions.
Low values → Weak market participation, but extreme lows can signal
oversold conditions.
Works well with major indices to confirm trends or spot divergences.

Cheat Sheet: Interpretation of Percentage of Stocks Above n-Day Average
% of Stocks Above n-Day MA Market Signal Interpretation
Above 80% Overbought
Many stocks are extended,
possible pullback
60%-80% Bullish momentum
Strong uptrend, broad
participation
40%-60% Neutral
Market in equilibrium, trend
unclear
20%-40% Bearish momentum
Weak breadth, fewer stocks
participating in rallies
Below 20% Oversold
Many stocks are beaten down,
possible reversal

Net New Highs & New Lows Analysis
Key Takeaways
1. Definition:
o The Net New Highs indicator measures the difference between stocks
making new 52-week highs and new 52-week lows.
o It reflects overall market strength or weakness and helps confirm trends.
2. Formula:
New Highs=New 52-Week Highs−New 52-Week Lows
Positive values → More new highs than new lows → Bullish market sentiment.
Negative values → More new lows than new highs → Bearish market
sentiment.

Net New Highs & New Lows Analysis
Key Takeaways
3. Why It Matters:
 A rising Net New Highs suggests strong market participation.
 A falling or negative Net New Highs signals weak market breadth
and potential downtrends.
 Useful for confirming index trends or identifying divergences.

Cheat Sheet: Interpretation of Net New Highs
Net New Highs Value Market Signal Interpretation
Above +100 Strong bullish trend
Market is healthy, new highs outpacing
new lows significantly
Between 0 and +100 Moderate bullish trend
More new highs than lows, but strength
is limited
Around 0 Neutral / indecision
Market is at an equilibrium, unclear
trend
Between -100 and 0 Moderate bearish trend
More new lows than highs, but selling
pressure is not extreme
Below -100 Strong bearish trend Market is under heavy selling pressure

Trading Strategies Using Net New Highs
Strategy: Trade in the direction of the Net New Highs trend.
Example:
If Net New Highs stay consistently above +100, the market is in a
strong uptrend → Look for buying opportunities in leading stocks.
If Net New Highs stay consistently below -100, the market is weak →
Avoid long positions or consider shorting weak stocks.

2. Spotting Trend Reversals (Divergence Trading)
Strategy: Look for divergences between the market index and Net New
Highs.
Example:
If the S&P 500 is making new highs but Net New Highs are declining, fewer
stocks are driving the rally → Warning sign of a weak uptrend.
If the S&P 500 is making new lows but Net New Highs are improving, the
broader market may be stabilizing → Potential bottoming signal.

3. Identifying Market Bottoms (Capitulation Signal)
Strategy: Extreme negative readings may signal capitulation and a potential market
bottom.
Example: If Net New Highs drop below -300 but start improving in the following days →
Look for rebound opportunities.
4. Trading Breakouts with Net New Highs Confirmation
Strategy: Use strong breadth signals to validate breakouts.
Example: If the S&P 500 breaks resistance while Net New Highs are rising, it confirms
strong buying participation → Go Long.

Net New Highs & Percentage of New Highs Analysis
Key Takeaways
1. Definition:
Net New Highs: The difference between stocks making new 52-week highs and those making
new 52-week lows.
Percentage of New Highs: Measures the proportion of new highs relative to total advancing
and declining stocks.
2. Formulas:
Net New Highs=New 52-Week Highs−New 52-Week Lows
Percentage of New Highs: =New Highs / (New Highs+New Lows)×100
Divergences between these indicators and index price trends can signal reversals.

Key Takeaways
3. Why It Matters:
Net New Highs reveal overall market health and trend strength.
Percentage of New Highs smooths fluctuations, making trends clearer.
Divergences between these indicators and index price trends can signal
reversals.

Indicator Bullish Market Bearish Market Warning Sign
Net New Highs > 0
More new highs than
lows → Uptrend
confirmation
More new lows than
highs → Downtrend
confirmation
Declining Net New
Highs during an
uptrend can signal
weakness
Percentage of New
Highs > 60%
Strong bullish
momentum, broad
participation
N/A
Overheated market,
potential for a pullback
Percentage of New
Highs < 40%
N/A
Strong bearish
sentiment, weak
breadth
Below 20% signals
oversold conditions,
potential bottoming

Trading Strategies Using Net New Highs & Percentage of New Highs
Strategy: Trade in the direction of Net New Highs and Percentage of New
Highs.
Example:
If Net New Highs > 0 and Percentage of New Highs > 60%, market
momentum is strong → Go Long on strong stocks.
If Net New Highs < 0 and Percentage of New Highs < 40%, the market is
weak → Short weak stocks or stay defensive.

Strategy: Look for divergences between market indices and these
indicators.
Example:
If the S&P 500 makes new highs, but Net New Highs and Percentage of
New Highs are falling, fewer stocks are driving the rally → Weakening
uptrend, possible reversal.
If the S&P 500 makes new lows, but Net New Highs are rising, selling
pressure is fading → Potential bottom forming.

3. Identifying Market Bottoms (Capitulation Signal)
Strategy: Extreme negative readings may signal capitulation and a buying
opportunity.
Example:
If Net New Highs < -300 but starts improving, sentiment may be shifting →
Look for rebound trades.
If Percentage of New Highs < 20% but then moves above 40%, market
strength is returning → Potential buy signal.

4. Trading Breakouts with Net New Highs Confirmation
• Strategy: Use strong breadth signals to confirm breakouts.
• Example:
 If an index breaks resistance while Net New Highs are rising, it signals
broad participation → Go Long.
 If an index breaks support while Net New Highs decline, it signals broad
weakness → Short the market.

The Arms Index (TRIN) Analysis
Key Takeaways
1. Definition:
The Arms Index (TRIN) is a short-term market breadth indicator that measures buying
and selling pressure based on the Advance/Decline Ratio and Up/Down Volume Ratio.
Developed by Richard Arms, TRIN helps identify overbought or oversold conditions.
2. Formula:
TRIN=(Advancing Stocks-Declining Stocks) / (Advancing Volume-Declining Volume)
TRIN > 1.0 → More declining stocks relative to volume → Bearish sentiment.
TRIN < 1.0 → More advancing stocks relative to volume → Bullish sentiment.

The Arms Index (TRIN) Analysis
Key Takeaways
3. Why It Matters:
TRIN shows whether price moves are supported by volume, helping
traders confirm market strength or weakness.
Extreme TRIN readings often signal short-term reversals.

Cheat Sheet: Interpretation of TRIN
TRIN Value Market Signal Interpretation
Below 0.5 Strong Bullish
Heavy buying pressure,
possible overbought market
0.5 - 0.8 Moderate Bullish
Steady uptrend with good
volume participation
0.8 - 1.2 Neutral
Balanced market, no strong
trend confirmation
Above 1.2 Moderate Bearish Selling pressure increasing
Above 2.0 Strong Bearish
Heavy selling pressure,
potential market bottom soon

Trading Strategies Using TRIN
Key Takeaways
1. Identifying Overbought & Oversold Conditions
• Strategy: Use extreme TRIN readings as contrarian signals.
• Example:
o If TRIN > 2.0, extreme selling → Look for potential buying
opportunities.
o If TRIN < 0.5, extreme buying → Market could be overbought,
consider taking profits.

Key Takeaways
Strategy: Trade in the direction of TRIN when it's within normal ranges.
• Example:
o If TRIN is between 0.5 and 0.8, bullish momentum is strong → Go Long.
o If TRIN is between 1.2 and 2.0, bearish momentum is strong → Consider
shorting.

Key Takeaways
Strategy: Look for divergence between TRIN and price movement.
Example:
o If the S&P 500 is making new highs but TRIN is above 1.2, volume
doesn’t confirm the rally → Possible weakness ahead.
o If the S&P 500 is making new lows but TRIN is below 0.8, volume shows
accumulation → Possible reversal.

Key Takeaways
4. Intraday Trading Strategy (Short-Term TRIN Readings)
Strategy: Monitor intraday TRIN for short-term market sentiment shifts.
• Example:
o If TRIN spikes above 2.0 during the day, fear is high → Look for intraday
bounce trades.
o If TRIN drops below 0.5 early in the day, excessive buying → Watch for
pullbacks.

McClellan Indicators: Oscillator & Summation Index
Key Takeaways
1. Definition:
o The McClellan Oscillator is a market breadth indicator that measures the momentum of
advancing and declining stocks using Exponential Moving Averages (EMAs).
o The McClellan Summation Index is a cumulative version of the Oscillator, used for
longer-term trend analysis.
2. Formula:
o McClellan Oscillator:
McClellan Oscillator=(19-day EMA of Net Advances)−(39-day EMA of Net Advances)
Positive values → Bullish momentum.
Negative values → Bearish momentum.

McClellan Indicators: Oscillator & Summation Index
Key Takeaways
o McClellan Summation Index:
Summation Index= ∑McClellan Oscillator Values
Rising Summation Index → Broad market strength.
Falling Summation Index → Weakening market.
3. Why It Matters:
Helps identify trends, reversals, and overbought/oversold conditions.
Oscillator is for short-term moves, while the Summation Index is for longer
trends.

Cheat Sheet: Interpretation of McClellan Indicators
Oscillator Value Market Signal Interpretation
Above +100 Overbought Market rally may slow down
Between 0 and +100 Bullish momentum Strengthening uptrend
Between 0 and -100 Bearish momentum Weakening market
Below -100 Oversold Market may be near a bottom
Summation Index Value Market Signal Interpretation
Above +1000 Strong Bullish Market trend is very strong
Between 0 and +1000 Moderate Bullish Uptrend, but watch for weakening
Between 0 and -1000 Moderate Bearish Downtrend developing
Below -1000 Strong Bearish Deep correction or bear market
McClellan Oscillator
McClellan Summation Index

Trading Strategies Using McClellan Indicators
1. Identifying Overbought & Oversold Conditions
Strategy: Use extreme McClellan Oscillator values as contrarian signals.
Example:
o If McClellan Oscillator > +100, market may be overbought → Consider
taking profits or hedging.
o If McClellan Oscillator < -100, market may be oversold → Look for buying
opportunities.

Strategy: Trade in the direction of the Summation Index.
Example:
If Summation Index is rising and above +500, market is in a strong uptrend
→ Go Long.
If Summation Index is falling and below -500, market is weakening → Avoid
longs or consider shorting.

Strategy: Look for divergences between the Oscillator and price movement.
Example:
o If the S&P 500 is making new highs, but the McClellan Oscillator is falling,
breadth is weakening → Possible trend reversal.
o If the S&P 500 is making new lows, but the McClellan Oscillator is rising,
selling pressure is fading → Potential bottom forming.

4. Trading Breakouts with McClellan Indicators
Strategy: Use the Oscillator to confirm breakouts.
Example:
o If an index breaks resistance while the McClellan Oscillator is above 0,
it confirms broad participation → Go Long.
o If an index breaks support while the McClellan Oscillator is below 0, it
signals broad weakness → Short the market.

Zweig Breadth Thrust Analysis
1. Definition:
 The Zweig Breadth Thrust (ZBT) is a rare but powerful bullish market signal.
 It occurs when the 10-day moving average of the Advance/Advance + Decline
Ratio moves from below 40% to above 61.5% in 10 trading days or less.
 Developed by Marty Zweig, it signals a rapid shift from bearish to bullish
momentum.
2. Why It Matters:
It is rare (happens only a few times per decade).
 A confirmed Zweig Breadth Thrust often marks the start of a new bull market.
 Failing to hit the threshold suggests the rally is unsustainable.

Zweig Breadth Thrust Analysis
3. Formula:
ZBT = Advancing Issues / (Advancing Issues+Declining Issues)
o Calculate a 10-day moving average of this ratio.
o If it moves from < 40% to > 61.5% within 10 days, it triggers a bullish
breadth thrust.

Cheat Sheet : Zweig Breadth Thrust Analysis
Condition Market Signal Interpretation
ZBT < 40% Bearish Sentiment
Weak market breadth,
potential downtrend
ZBT > 61.5% in <10 Days Bullish Breadth Thrust
Strong buying pressure,
possible bull market start
ZBT Stalls Below 61.5% Failed Signal
Rally may not be
sustainable

Trading Strategies Using Zweig Breadth Thrust
1. Bull Market Entry Strategy
Strategy: Enter long positions when ZBT is confirmed (>61.5% within 10 days).
• Example:
o If the ZBT successfully moves from below 40% to above 61.5% in 10 days,
it signals strong institutional buying → Go Long on stocks & indices.
o Consider leveraging positions in strong sectors for maximum gains.

2. Momentum Confirmation Strategy
Strategy: Use the ZBT to confirm bullish breakouts.
Example:
o If the S&P 500 breaks resistance and the ZBT confirms, broad
participation supports the move → Stay Long.
o If the ZBT fails to reach 61.5%, the breakout might lack strength → Be
cautious with long trades.

3. Trend Reversal Identification
Strategy: Use failed breadth thrusts to anticipate potential reversals.
Example:
o If the ZBT starts rising but stalls before 61.5%, it suggests weak breadth
→ Potential market pullback.
o If price action fails to hold key levels, consider shorting weak stocks.

4. Sector & Stock Selection Strategy
Strategy: Focus on leading sectors and stocks when ZBT confirms a bull
market.
Example:
o When a ZBT signal occurs, shift allocation to sectors like technology,
consumer discretionary, and small-caps that benefit from new bull markets.
o Select stocks with strong relative strength and high volume breakouts.

Lowry’s Reversals Analysis
Key Takeaways
1. Definition:
o Lowry’s Reversals analyze market buying power vs. selling pressure to identify
trend reversals.
o Developed by Lowry Research Corporation, this method looks at the balance of
demand (Buying Power) and supply (Selling Pressure) to forecast market direction.
2. Why It Matters:
o Helps confirm bullish or bearish reversals before price moves significantly.
o Divergence between BP and SP can signal a market top or bottom.

Lowry’s Reversals Analysis
Key Takeaways
3. Core Components:
o Buying Power (BP): Measures demand strength. A rising BP suggests
growing bullish momentum.
o Selling Pressure (SP): Measures supply pressure. A rising SP indicates
increasing selling force.
o Key Reversal Signal: A major shift in BP and SP can indicate a trend
change.

Cheat Sheet: Interpretation of Lowry’s Reversals
BP > SP and Rising Bullish Strength Market is in an uptrend
BP < SP and Falling Bearish Strength Market is in a downtrend
BP Rising, SP Flat/Falling Bullish Reversal
Accumulation phase, buy
signal
BP Falling, SP Rising Bearish Reversal
Distribution phase, sell
signal
BP & SP Both Falling Market Weakness
Market lacks strong
direction

40:1 Ratio Analysis
1. Definition:
 The 40:1 Ratio is an extreme market breadth signal that occurs when up volume
is 40 times greater than down volume (or vice versa).
 It signals intense buying or selling pressure, often appearing at key inflection
points in the market.
2. Why It Matters:
 A 40:1 up-volume surge suggests panic buying and strong bullish momentum.
 A 40:1 down-volume spike signals panic selling and extreme bearish sentiment.
 Rare occurrence, typically seen at the start of strong trends or near exhaustion
points.

Cheat Sheet : 40:1 Ratio Analysis
40:1 Up Volume Extreme Bullish
Heavy buying pressure,
possible trend continuation
40:1 Down Volume Extreme Bearish
Panic selling, possible
capitulation or further decline
Sustained 40:1 Up Volume Trend Confirmation Bull market strength
Sustained 40:1 Down Volume Trend Confirmation Bear market dominance
40:1 Ratio Followed by Weak
Volume
Exhaustion Signal
Potential reversal or
slowdown

High-Low Logic Index
1. Definition:
o The High-Low Logic Index (HLLI) is a market breadth indicator that measures the
simultaneous occurrence of new highs and new lows in a stock market index.
o Developed by Norman Fosback, it helps detect market indecision, trend strength, and
potential reversals.
2. Formula: HLLI = Min(% New Highs, % New Lows)
o Calculated using a 10-day moving average of the smaller percentage between stocks
making new 52-week highs and new 52-week lows.
3. Why It Matters:
o A low HLLI suggests a trending market (either bullish or bearish).
o A high HLLI indicates market indecision, often preceding major reversals.

Cheat Sheet : High-Low Logic Index
HLLI Value Market Signal Interpretation
Low (Near 0%) Strong Trend
Market is moving in a clear
direction (bullish or
bearish)
Rising HLLI (>5%) Market Uncertainty
Potential trend reversal or
increased volatility
High HLLI (>10%) Extreme Indecision
Often signals a major
turning point
HLLI Falling Trend Continuation
Market resuming its
primary trend

Hindenburg Omen
1. Definition:
o The Hindenburg Omen is a technical warning signal indicating a high probability of a
stock market decline or crash.
o It occurs when new 52-week highs and new 52-week lows happen simultaneously in
large numbers, signaling market instability.
2. Why It Matters:
o It signals market divergence, where some stocks are surging while others are
collapsing—often a warning of a market top.
o Historically, multiple occurrences within a short period increase the risk of a major
market correction or crash.

Hindenburg Omen
2. Conditions for a Hindenburg Omen Signal:
o The number of new 52-week highs and new 52-week lows both exceed 2.2% of
total issues on the NYSE.
o The NYSE Composite Index is above its 50-day moving average (indicating an
uptrend).
o McClellan Oscillator is negative (showing weakening breadth).
o The new highs are not more than twice the new lows (preventing false signals).

Cheat Sheet : High-Low Logic Index
Single Hindenburg Omen
Signal
Warning Sign
Possible short-term
pullback
Multiple Signals in 30 Days High-Risk Zone
Strong chance of market
correction or crash
No Confirmation in 30
Days
False Signal
No significant impact
expected
Occurs Near Market Highs Major Red Flag
Increased likelihood of a
sharp downturn

Range Shifts Qualitative Indicator
Key Takeaways
1. Definition:
 A Range Shift is a change in the price action dynamics of a stock or market,
indicating a potential shift in trend strength or direction.
 Used in momentum and trend analysis, it helps identify bullish or bearish
transitions.
 Typically observed through Relative Strength Index (RSI), MACD, or price action
behavior in different market phases.

Range Shifts Qualitative Indicator
2. Types of Range Shifts:
 Bullish Range Shift: RSI moves from 40-80 range instead of the previous 20-60 range,
indicating stronger upside momentum.
 Bearish Range Shift: RSI moves from 60-20 range instead of the previous 40-80
range, signaling downside momentum.
 Neutral Range Shift: Market remains in a tight range, signaling consolidation before the
next move.
3. Why It Matters:
 Helps detect early trend changes before traditional trend indicators react.
 Useful for momentum traders, swing traders, and trend-followers.
 Can filter out false breakouts by confirming a range shift before entry.

Cheat Sheet : Range Shifts Qualitative Indicator
RSI Shifts from 20-60 to 40-
80
Bullish Range Shift Strong uptrend developing
RSI Shifts from 40-80 to 60-
20
Bearish Range Shift Strong downtrend forming
Price Holding Above
Previous Resistance
Bullish Confirmation
Higher price range
established
Price Holding Below
Previous Support
Bearish Confirmation
Lower price range
established
Failure to Maintain New
Range
Reversal Risk Possible trend exhaustion

Fall Days & Spring Days
Key Takeaways
1. Definition:
 Fall Days and Spring Days are market breadth indicators that help identify potential trend reversals and
market momentum shifts.
 Fall Days indicate periods of widespread market selling and potential bearish continuation or bottom
formation.
 Spring Days signal strong broad-based buying, indicating bullish momentum or a potential trend reversal.
2. Why It Matters:
 These indicators help traders detect market extremes and anticipate trend shifts before they become
obvious.
 Useful for market timing, risk management, and trend-following strategies.

Cheat Sheet : Fall Days & Spring Days
Multiple Fall Days in a Row Bearish Continuation
Downtrend may continue,
avoid buying
Isolated Fall Day After an
Uptrend
Caution Signal
Possible trend weakness,
watch for confirmation
Multiple Spring Days in a Row Bullish Strength
Uptrend is gaining momentum,
consider buying
Spring Day After a Downtrend Potential Bottom
Watch for reversal
confirmation before going long
Low-Volume Fall/Spring Days Weak Signal
Market indecision, wait for
confirmation

Next Chapter 1 - Extrapolating Price from Volatility
Next Section 6 - Volatility Analysis
Presented By :

Section 5 - Chapter 2 - Market Internals

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Section 5 - Chapter 2 - Market Internals