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Trading CMI 01/06/2012 4.45pm

How to Trade CMI (Combined Market Internals)

Combined Market Internals Indicator shows a Combined Market Trend of Internals of $ADV, $DECL, $TICK, $TRIN, $ESINX, XLF, SPY in Real-Time. CMI shows underlying trend in a Histogram. CMI Ribbon shows the detail of internal trends.

Picking tops and bottoms is usually a losing proposition for most traders. I remember doing that with pride (false) of my ability to pick tops/bottoms early in my career. But markets quickly served me with reality and taught me great lessons right in the beginning of my career. Now I use wisdom when I analyze market tops/bottoms and remember my past experiences :)

Most wise analysts always say, Market Internals give a Top or Bottom signal far before any of the underlying trading instruments signals. Well, so how do we find which Market Internals and what are these signals?

I use CMI (Combined Market Internals) as my key Market Indicator. It uses 6 Market Breadth instruments and an arbitrage ($ESINX) to compute a complex Mathematical equation to derive a single Market Direction and plot it as a Histogram. I follow this CMI direction as a key resource for my pattern trading. I do not follow any other internals as I think the components I selected for CMI have a great significance in aiding me with finding the market direction.

I have studied CMI for about 4 years now and I think I have a pretty good understanding of how it works. It helps me in finding 1.) Underlying the Market Internals direction, 2. ) The Divergence between CMI and my trading instruments like ES, YM or NQ 3.) A Market Top and Bottom signal when it reaches extreme values in CMI.

Here I will discuss the third point, CMI extremes as signal for Market Tops/Bottoms. Remember my consideration for Market Top or Bottom is on a 5m CMI chart. It is not daily or 60m chart. I am trying to find a temporary Tops/Bottoms in SPX giving me 3-8 points profits during intraday. If I am in a position and I see CMI reached an exhaustion levels, then I take my profits out. Historically I have seldom came across CMI trading above +/- 200 levels. Not sure exactly how 200 level matters, but I noticed when markets start to trade above +/- 150 levels, it has signaled a Top or Bottom (even short-term) for at least 3-8 points.

I have plenty of cases of CMI extremes signaled followed by Market Reversals. On Jan. 05, 2012 was such an opportunity to find a ES Top.

On Jan. 5 markets rallied all morning from a low of 1260 and reached 1278 by 1.30pm ET. I was trading an ABC Bullish pattern and was out of my positions by 1272 level. ES continued its uptrend and rallied to 1278 level. Around 1.30pm, I noticed CMI reached its exhaustion level +150 ((Chart 1). ES price level was also coincided with my pattern exhaustion level 1278. By 2pm, Market internals started to weaken as ES started to trade below CMI 150 level. This provided another trade opportunity for me to short ES from 1275 level. Around 3.45pm, I closed my trade at 1270.5 to net 4.5 points profit in ES. I knew ES may fall futher down, but I do not want to deal with market closing volatility. ES continued to fall (Chart3) and trade lower in Globex trading.

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