Broad Market Indicators

The overall conditions of the market or sectors have a tremendous effect on individual stock prices. Being aware of the overall market conditions is as critical as a pilot familiarizing himself with the weather before take-off. Stock prices have a strong tendency to move together in the same direction especially in the short-term. Stocks are also especially susceptible to the collective trading direction of their peers within the same sector. Conversely, individual stocks have a strong tendency to affect their entire sector as well, if the price effect is large, and particularly if the stock is among the larger or more popular stocks in the group. The larger the company capitalization, the more likely it is that its individual price action will affect the rest of its peer stocks within the sector.

Familiarizing yourself with important technical levels of the market, trading environment and its corresponding effects and counter effects on stocks is a proven method for improved trading. Knowledge of the broad market’s condition is akin to having a bird’s eye view and helps greatly in avoiding the trap of short-term noise.

DJIA - Dow Jones Industrial Average

The Dow Jones Industrial Average, popularly called “the Dow,” is the world’s most widely followed stock market index. The Dow measures the combined price activity of 30 of the United States’ top companies. Each company in the Dow represents a major industrial sector in order to reflect a diversified view of market conditions. Of the many indices available to track the stock market’s progress, the Dow is the most popular, not only because it is an index that has a very long history, but also because of its simplicity and its reflection of America’s best. Over its long history, this index has reflected the health of U.S. equities across a multitude of economic and social conditions.

A couple of very important milestones for the Dow occurred in the late 1990’s. During this time, the Dow attained the 10,000 level for the first time, and shortly after, the inclusion of two NASDAQ Stock Market issues, Intel and Microsoft, were incorporated into the Dow for the first time in history. Prior to this, only stocks that were traded on the New York Stock Exchange made it into the Dow Component List. This milestone was a reflection of change, and changes to come, as the index is adjusted to face a new round of economic fluctuations, surely to be measured accurately by the Dow.

The Current List of Dow Jones Industrial Components Include:

Alcoa Inc AA
American Express Company AXP
AT&T Inc T
Bank of America Corporation BAC
Boeing Co BA
Caterpillar Inc CAT
Chevron Corp CVX
Cisco Systems Inc CSCO
E.I. Du Pont de Nemours and Company DD
Exxon Mobil Corp XOM
General Electric GE
Hewlett-Packard Co HPQ
Intel Corporation INTC
International Business Machines IBM
Johnson & Johnson JNJ
JP Morgan & Chase & Co JPM
Kraft Foods Inc. KFT
McDonald’s Corporation MCD
Merck & Co., Inc. MRK
Microsoft MSFT
Pfizer PFE
The Coca-Cola Company KO
The Home Depot, Inc. HD
The Procter and Gamble Company PG
Traveler’s Companies Inc TRV
United Technologies Corporation UTX
Verizon Communications VZ
Wal-Mart Stores WMT
Walt Disney Co DIS

S&P 500 - Standard & Poor’s 500 Index

Second to the Dow, the Standard & Poor’s 500, or S&P 500, is a widely followed index comprised of a diverse group of 500 top equities traded on U.S. Stock Exchanges. Unlike the Dow that only measures the combined movement of 30 companies, the S&P 500 measures a broader spectrum of price activity in equities, which reflect depth and reach of the money movement in to, or out of, 500 top stocks traded across different exchanges – NYSE, NASDAQ and AMEX.

The S&P 500 Index is the basis of the mighty S&P 500 Futures Contract, traded on the Chicago Mercantile Exchange. Institutions and individual participants of the market use the highly liquid S&P 500 Futures Contract as a trading vehicle to take positions or even to hedge their equity holdings in anticipation of the equity market’s general direction. The price action of the S&P 500 Futures contract itself is a popular indicator used by traders to anticipate future market direction.

NASDAQ - NASDAQ Composite and NASDAQ-100 Index

The NASDAQ Composite Index began in 1971, with a base value of 100. Since then, this index has risen to over a level of 5,000, achieved in the year 2000. This index is a reflection of the combined movement of over 4,000 stocks traded on the NASDAQ Stock Market, both domestic and international. The NASDAQ is one of the 3 main stock market indices commonly followed by the investing public. It is characterized as the index that tracks the more speculative issues in the world of equities, and thus, has historically reflected a higher level of volatility and risk in comparison to the other 2 common measures of the market (the Dow and the S&P 500). Because the index contains over 4,000 stocks, it is one of the broader measures of the market.

The NASDAQ-100 Index, or the NDX, measures the combined price movement of 100 of the largest non-financial stocks traded on the NASDAQ. Unlike the Dow and S&P 500, the selection process of the components in this index is measured by the size of its market capitalization or the collective dollar value of each company’s shares. The NDX has a very high correlation to the NASDAQ Composite. These two indices have historically moved in the same direction and magnitude over 90% of the time.

The NDX is the basis of the NASDAQ-100 Futures Contract, also traded on the Chicago Mercantile Exchange. Like the S&P 500 Futures, traders use the movement of the NASDAQ Futures itself as an important tool to anticipate the movement of and direction of individual stocks, particularly if these are technology related issues.

Sector Indices

While stocks have a tendency to move together in the same direction, sectors, or groups of stocks, normally go through a rotational process, as some sectors are stronger or weaker than others during certain periods of time. Stocks within the same sector are very likely to trend or move in the same direction at once. It is beneficial for a trader to know which sectors are experiencing strength or weakness for the given time period.

In selecting individual stocks to trade, familiarizing yourself with the condition of its peers within the same sector by monitoring sector indices is crucial to building enough evidence to initiate a trade on an individual stock.

In addition, understanding the rotational corrective process that the broad market undertakes on a daily basis is key to an in-depth perception of the markets.

Some examples of Sector Indices and their corresponding symbols:

Banking BKX
BioTech BTK
Consumer CMR
Commodities CRX
Cyclicals CYC
Defense DFX
Pharmaceutical DRG
Dow Transport DTX
Gold GOX
Retail RLX
Semi-Conductor SOX
Gold/Precious Metals XAU
Broker/Dealers XBD
An Up Day in Most Sectors

TICK Indicator

The NYSE and NASDAQ TICK Indicators are tools traders use to measure the breadth of a market’s short-term direction. The TICK counts the number of advancing versus declining stocks based on whether these stocks are on an UPTICK (upward momentum) or a DOWNTICK (downward momentum). TICK is neutral at Zero (0) and becomes increasingly bullish as it goes up (+100, +200, +300… +900) and bearish as it descends below zero (-100, -200, -300… -900). As a rule of thumb, consistently high TICK readings on a daily basis suggest a broad participation in a trend that likely has upward bias, and conversely, consistently low TICK readings on a daily basis suggest broad selling in a market that likely has a downward bias.

Traders also use the TICK readings to measure intraday saturation. For example, an extremely high TICK (+1000) reading suggests that a market has expended a lot of energy and is likely to pause, slow in momentum or pull back. Conversely, an extremely low TICK (-1000) reading suggests a temporary saturation of selling.

High TICK Numbers Are Bullish

TRIN Indicator

The TRIN, also known as the “ARMS” Index (named after its originator, Dick Arms), measures the breadth of the market's participation, and, unlike the TICK, includes in its calculation the volume of advancing and declining stocks. The TRIN is a popular tool used by traders to help determine temporary overbought and oversold conditions by taking its averages over a 3, 5 or 10 day period. High TRIN averages are consistent with dominantly downtrending markets and vice versa. The calculations are done from the NYSE Listed stocks, but most traders see a strong influence in the NASDAQ market as well.

On the short-term and intraday basis, traders use the TRIN to help determine the day’s directional bias. High TRIN readings are associated with dominantly down days and low TRIN readings are associated with dominantly up days. Accepted norms for TRIN are readings of 1.0 are a neutral market. Less than 1 (0.9 – 0.3), is considered bullish, while higher than 1.0 (1.1- 1.8) is considered bearish. Again, extremes in TRIN readings may indicate a market pause or reversal. The TRIN is a very versatile tool traders use to help remind them of the market’s favored direction based on its breadth and corresponding volumes.

TRIN Under 1 is Bullish

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions.

The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Past results are not a guaranty of future performance.

Free Class