In 2014, I spent about 6 months in a row with this unique traders tool called Market Internals, exploring its possibilities every single day, searching for new and creative implementation ideas for my own automated trading systems (ATSs). With a real obsession with this concept, I finally found almost 40 new ideas (mostly my own proprietary ideas) on how to squeeze the most out of this great tool, and slowly started implementing many of them into my own trading – with great success.I truly believe that Market Internals can give a trader a small, unfair advantage – if thoroughly thought out and implemented well, especially in new, creative ways. Therefore, in this article, I would like to give you a very brief introduction into the Market Internals world, together with an example of one of my private Market Internals filters – to show you, how dramatic the impact of Market Internals deployment can be – in a favorable way.Introduction: What are Market Internals (MI)We all know how hard it is to find a new, viable trading edge. We are also aware that the scope of our possibilities is quite narrow: It doesn’t really matter what trading indicators or other tools of technical analysis we use – most of the time they all use the same source of data anyway. This data consists of Open, High, Low and Close values of the bars in our trading chart, and whatever trading indicator we use, we basically use only a slightly different interpretation of the same O-H-L-C values.So, if we really want to go a step further and implement a broader view for our trading decisions (trading entry/exit conditions), we have to start investigating outside of the O-H-L-C values. We can, for example, implement information like Volume or Open Interest to our trading entry/exit conditions, which is not a bad idea at all, and many of my ATSs use O-H-L-C values together with Volume effectively.However, we can still go a step further.We can do something that many traders have no idea they can even do: We can start making our trading (entry/exit) decisions based not only on the data coming from the underlying market but also on taking into consideration the market (its overall direction, quality, strength and overall “mood”) as a whole!Just imagine:Wouldn’t it be fantastic to know where the stock market as a whole is heading, before we enter a position in our emini S&P strategy?And that is exactly what Market Internals are about: The ability to read the market as a whole and effectively incorporate this much broader view into our trading decisions.Market Internals: A quick introductionSo what exactly are Market Internals? Where do they come from?It’s very simple: Market Internals are information about the overall stock market, provided by the stock exchanges (NYSE, AMEX), usually in the form of a standalone data feed.And this data feed instantly provides us with real-time information about the overall stock market situation.Using Market Internals we can immediately, in real-time, start receiving information like, for example:

How many stocks from the Dow Jones Index have just moved up and how many down?

Is the volume of all rising stocks from the Dow Jones index higher or lower than the volume of all falling ones?
Or even:

How do ALL stocks move in the entire NYSE? Are most of them rising or falling?

How many stocks have a price that hasn’t changed?

What is the direction of the majority of the volume? Up or down?

Do the 30 stocks in the Dow Jones index correspond with the rest of the market, or does the Dow Jones index now live its own life?
As you can see, there is plenty of information that can be obtained through this standalone data feed about the stock market as a whole (and later on, to be used in our strategies).All this information can be split into several different categories, and every category has its own meaning and preferred method of implementation. However, because the space for this article is very limited, and the subject of Market Internals could give more than a dozen articles like this, I am going to focus only on one Market Internals category, one of my most favorite, the MI pair UVOL-DVOL.Market Internals: UVOL-DVOLThis category of MI simply consists of two separate data feeds provided from the exchange:$UVOL monitors the total volume of all rising stocks on the exchange.$DVOL monitors the total volume of all falling stocks on the exchange.By using these data feeds (often called MI indicators), we can monitor the volume on one side or the other, so we can get a better idea where the volume is moving to, i.e. which side is stronger. This is, of course, a very powerful view on the market that can provide us lots of important information (if we know how to use it).From a practical means, we usually add two different data symbols into our chart (data2 and data3) to start using UVOL-DVOL pair for our trading.Then we can start using these MI indicators as additional, or even leading filters (or as I usually call them – “Super Filters”) for our existing systems – with the goal to improve them significantly.Let’s have a look at such a condition in practice. I am going to reveal one of my proprietary UVOL-DVOL MI conditions, which I use as a filter for many of my breakout index or stock strategies (MI can only be implemented on indexes or stocks of futures indexes).UVOL-DVOL as a filter for significant improvementTo demonstrate the effect that Market Internals can have, I have decided to use the most simple condition that I could think of – a primitive breakout condition high=highest(h,N1). I haven’t done any optimization of the N1 parameter, nor have slippage and commission been included in the results shown below – the purpose of this article is not to present a functional breakout trading system but to demonstrate that Market Internals can be applied to even the most basic systems and get immediate, and very often dramatic, improvements. For the N1 parameter, I have used the first number that came to my mind, number 20.Here is the basic code that I will use to demonstrate the impact of the Market Internals “Super Filter”. The test will be completed on the EMD.D market, 15 minute timeframe, from 3/22/2006 – 3/21/2016:If high = highest(h,20) then buy this bar at close;setstoploss(600);setexitonclose;Here are the results:Net Profit: $79,440Profit factor: 1.17Avg. Trade: $36.52Max Drawdown (close to close): $12,650Net Profit / Max DD: 6.28Number of trades: 2175Now let’s move to the implementation of a very simple Market Internals condition that is based on the following rules:

Calculate the difference between UVOL and DVOL,

Calculate a 30 bar simple moving average of this difference,

If the UVOL-DVOL difference is above the moving average of the UVOL-DVOL difference AND high = highest(h,20), a Long position is opened,

The position is closed by the end of the day or when the 600 USD stop-loss is hit.
In a moment, I will show you the outcome of the application of this code to the original system. But first, I need to mention that I have used several small add-ons, like for example, taking into consideration the zero line of the UVOL-DVOL difference to cancel the “Super Filter” in certain situations – all of this is included in the code and the workspace that you can download at the end of this article. Yet the basic idea is exactly as I have described it – to work with the UVOL-DVOL difference and with the moving average of this difference.Let’s take a look at the results after application of the Market Internals “Super filter”. First, the performance report:Net Profit: $76,000Profit factor: 1.38Avg. Trade: $63.81Max Drawdown (close to close): $7,790Net Profit / Max DD: 9.76Number of trades: 1191And finally, the comparison table showing the results before and after the application of the Market Internals based “Super Filter”.Metric / Before MI / After MI / ImprovementNet Profit / 79,440 / 76,000 / -4.3%Profit Factor / 1.17 / 1.38 / +17.9%Avg. Trade / 36.52 / 63.81 / +74.7%Max DD (C-to-C) / 12,650 / 7,790 / -36.8%Net Profit Max DD / 6.28 / 9.76 / +55.4%Trades / 2175 / 1191 / -45.2%I believe that the numbers speak for themselves – maximum drawdown has improved by almost 40% (36.8%), Average trade by +74.8%, and the Net Profit to Maximum DD ratio by +55.4%. All really great improvements, and I see similar improvements of Market Internals very often.ConclusionI have been using Market Internals for my own trading since 2014.Here is what I have generally achieved by implementing them into my own trading strategies:

Reduce max. Drawdown

Improve Avg. Trade

Improve Net Profit / Max DD ratio

Smoother equity curve

Overall improvement of portfolio performance

Getting additional psychological confidence by knowing that I only trade in highly favorable market conditions.
I was really surprised that Market Internals are used by so few traders, yet, when I present them the Market Internals possibilities, they usually get quite excited and implement it to their own trading systems with instant positive impact.This is exactly the reason why I like them and encourage all traders to investigate them further.

Previously, I discussed reasons our economy would go through a major downturn.[1] My study of major bear markets[2] indicates that after a market top and drop, such as the one we have experienced since January 26, there is a second top coming within -2.6% and +2.9% of the first. This marks the beginning of a major bear market. Having arrived at the traditional topping range, what can we reasonably expect moving forward?What follows is a summary of market behavior for every major bear market since 1929 that, like ours, was preceded by a correction. There are six of them starting in 1929, 1937, 1946, 1969, 2000, and 2007. S&P 500 data is used for the 1968, 2000, and 2007 bear markets. Dow Jones closing data[3] was used for all bear markets before that.1929
The largest drops for this market were (trading days from the peak given in parentheses) 13.5%(12), 11.7%(13), 9.9%(17), 6.8%(20), and 6.3%(9). The 30-day average change was -1.07%. By trading day 10 the % loss was 15.1%. By day 30 it was 31.0%.1937
The largest drops for this market were 5.0%(18), 4.5%(15), 4.3%(28), 4.1%(24), and 3.1%(20). The 30-day average change was -0.68%. By trading day 10 the % loss was 6.0%. By day 30 it was 19.1%.1946
The largest drops for this market were 2.5%(15), 1.2%(13), 1.0%(30), 0.95%(14), and 0.77%(8). The 30-day average change was -0.13%. By trading day 10 the % loss was 0.9%. By day 30 it was 3.9%.1968
The largest drops for this market were 1.4%(19), 0.92%(3), 0.90%(17), 0.89%(4), and 0.77%(18). The 30-day average change was -0.29%. By trading day 10 the % loss was 2.7%. By day 30 it was 8.4%.2000
The largest drops for this market were 2.6%(28), 1.9%(24), 1.6%(27), 1.5%(19), and 1.4%(10). The 30-day average change was -0.33%. By trading day 10 the % loss was 5.0%. By day 30 it was 9.6%.2007
The largest drops for this market were 2.9%(10), 2.6%(15), 2.5%(6), 1.8%(27), and 1.6%(29). The 30-day average change was -0.24%. By trading day 10 the % loss was 2.6%. By day 30 it was 7.3%.All the bear markets declined gradually for the first week. In fact, it was rare to find a substantial drop during that first week. Except for 1969, none of the largest percentage drops took place during the first week and those were only 0.92% and 0.89%. Markets did begin to diverge during the second week with the 1929, 1937, and 2000 markets dropping 15.1%, 6.0%, and 5.0%, respectively, after 10 trading days.Once the top was reached, there was no turning back. Instead, most markets had a steady decline. The only exception was the exceedingly volatile 1929 market, which declined 35% by the 13th day recovered 19% and subsequently resumed its decline. This is an important point for our market since the S&P 500 had an intraday high of 2801.90 March 13. This placed it within 2.5% of the January 26, 2018 high, just within the window for the second peak topping range. That would have placed that potential second peak historically early for a major bear market with a correction preamble. The fact 24 trading days later we are still waffling back and forth and in a recent uptrend is in stark contrast to previous major bear market profiles and argues against that being the second peak.Note that, except for the 1929 market, which by that time was recovering, none of the markets had reached bear territory 30 trading days after the market peak. Technically, the 1937 market had dipped into bear territory days before it but was only sitting 19.1% below the peak by day 30. All the other markets were only approaching correction level territory.Given that summary, it is likely that we will also experience a gradual decline with little damage the first week. In fact, with large loss days paling in comparison to those we saw in early January, it may well lull investors into a sense of complacency. Having gone through a long correction already, there will likely be little concern a month and a half later if the 30th trading day arrives with losses still in the single digits. That would be a mistake as the bear relentlessly creeps up on us.[1] It’s Not Over, EzineArticles, April 9, 2018.
[2] The Coast Is Not Clear – Signs of an Impending Major Stock Market Crash, EzineArticles, February 20, 2018.
[3] Wharton Research Data Services (WRDS) was used to gather the Down Jones closing data and in preparing this article.