Looking Under the Hood with Market Internals (Part 2) – Answer Key

Drill 1

We can see from the chart above that after the major move higher (in the red box), and despite all of the TICK extremes,
the market continued higher and closed on its highs. The reason for this is that we were breaking out of a large multi-
day balance area (shown in the original drill), and major TICK extremes during a breakout only serve to confirm the
breakout and show the conviction of the buyers (same for a downside breakout where sellers have high conviction). In
these cases, despite having what looks like overextended prices, the overall context tells us that we are very unlikely to
see a reversal. At best, the TICK extremes usually cause a slowing in the directional move. Here we started balancing
while continuing to drift higher. But the lesson is that you should never look at TICK extremes in isolation. When they're
coming during major breakout moves, do not stand in the way of the move. You would have had a quick loss if you did in
this instance.

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Drill 2

While we don't have the whole bigger picture context (which we would need to analyze), the general odds were better
that we'd head lower. The reason for this is that we were clearly in a balancing day in which there was no sustained
directional conviction. Therefore, after a straight-line move higher extending into the previous intraday selling tail, the
odds were that the TICK extremes were showing signs of exhaustion, and that the move through the previous resistance
would fail.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

Drill 3

It was pretty clear that by the time we were hitting the -1100 extremes in the TICK, we were already in a trend day to
the downside. Given this, we would not view negative TICK extremes as exhaustion points, but rather at best as points
where the move will rest before resuming down further. In this case, the market instantly kept dropping heavily, and
then ended up balancing and building value lower as the day progressed. The TICK extremes were showing strong
directional conviction on the side of the sellers in this context, instead of pointing to a potential for reversal like in the
previous drill.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

Drill 4

At the point in question, we were hitting -400 on the TICK. This doesn't seem like an extreme, but we’re in an up-trend
day. The TICK as a whole was clearly shifted upwards above the zero line. This means that the extremes for counter-
trend moves had shifted upwards too. In the original drill, we see that the previous counter-trend pullback had reversed
at a reading of around -500. Now we were pulling back and hitting a reading close to that. This told us that this pullback
was likely at or close to a reversal point, and we would likely be seeing higher prices soon after. In this instance, the
market balanced for a while and then took off to new highs. The TICK extreme alerted us to the end of the pullback.
(Note that it's not always so ideal. At times we'll get more than one TICK extreme in a pullback. But in general in strong
trends, we'll at least be near a reversal point at one or more extremes.)

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Drill 5

The TICK was evenly distributed above and below the zero line. There was no tilt to either side. Its upper and lower
extremes were also hovering at +800 and -800 respectively. Neither side was providing more conviction. This was a clear
indication that we’re experiencing a balancing day.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

Drill 6

The TICK was clearly distributed more heavily below the zero line, hitting extremes of -800 to -1000 all day long, time
and time again. To the upside, it was hitting peaks at +600 to +800 max. This told us that the sellers were in control. The
fact that we hit so many downside extremes and they were so clustered, told us that the sellers also had conviction and
were consistent in their control. The days that show that type of behavior are the trend days. So the TICK was telling us
that we were experiencing a trend day to the downside. This would have been clear within the first couple of hours as
the downside extremes kept coming one after the other. This shows that it's not just the absolute level the extremes
reach, but how often they're reached and how much these readings are clustered one after the other. Trend days
display a clustering of numerous extremes throughout the day.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.