Over the years, I have gone from being an extremely active trader in the equity market to one who trades less frequently and has more of a longer-term focus with many of my equity positions. But despite the change in the frequency with which I am buying and selling shares of individual stocks and broad-market ETFs, there are two indicators I continue to use every day when I'm considering making a purchase (or short selling): The number of advancers versus decliners on the NYSE and Nasdaq, and the advancing volume versus declining volume on the NYSE and Nasdaq.
I cannot emphasize enough how valuable these two indicators are when timing the market on an intraday basis. There are many days during which it is extremely easy to predict (absent unforeseen intraday breaking news) how the markets will trade as the day goes on simply by using advancers to decliners and advancing volume to declining volume as a gauge of the underlying strength of the market. Today was the latest example.
When there is advancing issues and advancing volume of 70% of more, it is an indication that the markets have underlying strength, will not have a weak close, and are incredibly likely to have a strong close. When the advancing issues and volume is in the mid-80%s or higher as we approach the 2 pm Eastern hour, the market is a screaming buy into the close. By market, I am referring to four indices in particular: The S&P 500 (SPY), the Dow Jones Industrial Average (DIA), the Nasdaq 100 (QQQ), and the Russell 2000 (IWM).
The same is true in reverse. If you are seeing 70% or more decliners to advancers and declining volume to advancing volume, it is a clear signal the market will not have a strong close and that the market is very likely to have a weak close. If the declining issues and volume is in the mid-80%s or higher, the market (and all the aforementioned ETFs) are screaming sells into the close.
For someone who is not a trader, but a longer-term investor looking to slowly build positions in broad-market indices, you can also benefit from advancers/decliners and advancing volume/declining volume data. Today is a good example of how to do that. SPY rallied 1.11% off its low of the morning, and DIA, QQQ, and IWM rallied 1.14%, 1.24%, and 1.66%, respectively, off their morning lows. At one point, the Dow Jones Industrial Average even went positive on the day. But as the rally took place, I noticed virtually no improvement in the underlying strength of the market. In other words, the number of decliners on both the NYSE and Nasdaq remained quite high with the NYSE remaining in the low 80%s and the Nasdaq remaining around 70%. On the volume side, the NYSE declining volume represented around 80% of the total volume as the day (and rally) went on, and the Nasdaq declining volume stayed in the mid-to-upper 70%s. As a trader, those were the types of screaming sell signals I would look for to short the market. As someone who was looking to slowly add to a position in VWO, it was a signal for me not to chase but to instead place my order closer to the day's lows and wait.
VWO is the Vanguard FTSE Emerging Markets ETF, which you will notice does not correspond to one of the aforementioned indices I mentioned as representing the "market." Even though NYSE and Nasdaq advancing/declining data doesn't seem to influence some of the non-U.S.-focused indices and ETFs in the same way it influences SPY, DIA, QQQ and IWM, I do still use it as a general directional gauge.
The closing advancing/declining data on the NYSE and Nasdaq looked like this today (percentages represent percent of total issues traded or percent of total volume traded):
NYSE Advancing Volume
NYSE Declining Volume
Nasdaq Advancing Volume
Nasdaq Declining Volume
The difference between the sum of advancers/decliners and advancing volume/declining volume and 100% is unchanged issues/volume.
Not surprisingly given the closing advancing/declining data on the NYSE and Nasdaq, all the major indices sold off notably from their session highs. The S&P 500 closed 14 points off its high, and the Dow, Nasdaq 100 and Russell 2000 closed 129.05, 28.01 and 7.4 points off their session highs.
So what's the important lesson from today's trading day? You don't have to blindly make buy and sell decisions on any given day. Using the market's internals to determine that day's underlying strength and weakness can absolutely help you make more informed and better decisions about the prices at which you enter your orders. It has helped me on countless occasions virtually without fail, and I am of the opinion it can do the same for you (random major breaking news can change things ... in which case, you should immediately change your thought process as well).