CMI (Combined Market Internals) measures the underlying market strength using breadth indexes ($ADV, $DECL, $TICK, $TRIN, $ESINX, SPY, XLF). Most analysts follow market internals very carefully as markets usually trade in the same direction as market internals. CMI is computed (intraday only) using an advanced mathematical algorithm (using above breadth indexes) and plotted as a single histogram. Plotted CMI values show market strength and market direction. General wisdom is to trade markets only in the direction of market internals (CMI).
Today (Nov. 18, 2015) markets were quite strong from the open. CMI was signaling strong strength from the open. I usually wait first 15 minutes (30 minutes in a slow markets) for the internals to settle for accurate CMI readings. This morning, CMI was unwavering in its direction (UP) until noon in the first phase (1) of the market. Around noon, CMI turned RED signaling change in internal strength in Phase (2). CMI RED automatically does not mean trend is negative or down-trend. This phase (2) continued until 2.15pm. After the Fed news, around 2.15pm, CMI changed its trend and continued its original market trend (UP) in Phase (3). As a short-term trader, I use CMI market phases to trade the underlying instruments (@ES, @NQ, @YM). During the first phase I only enter LONG positions. Since the market trend was pretty strong in Phase (1), Phase (2) may be only a corrective phase. In Phase (2), market is signaling a side-ways or consolidation mode without any clear trend. The best any trader could do is to stay away trading in Phase (2). Once a trend is confirmed in Phase (3) using CMI, now only trade Long side until CMI changes.
Please Note, I am not trading CMI color changes or these Phases... I am trading underlying market instruments @ES, @NQ, @YM using Patterns. I strongly discourage users to trade ONLY Support Tools (like CMI) exclusively.
You can plot CMI in any intraday time-frame chart, but I primarily plot/analyze in 5m chart and 3m charts. Three Minute (3m) charts show heads up signal in the trend to come in 5 minute CMI chart. One of the critical point in 3m charts is to show the CMI strength zones. CMI values of -20 to +20 show slow and chop zones. Trading above +20 or below -20 show the trend zones. When CMI is persistantly trading between -20 to +20, I would wait for clear trend direction (out side of 20 bands).
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