The MCM indexes are a proprietary product which indicates not only the emotional state of the markets (via the accumulation index), but also the most important components: the dollars added to the market, the stock share directionality and rich vs. cheap tickets. All these provide important information into the internals of the market and whether the action is healthy or there is reason for a more defensive stance. The basic way to use it is whether the AI and it’s components are confirming the price action or not. So in an up day, the AI should be cyan and going up, the cash added should be positive (the higher the better), directionality green and rising and also more rich tickets than cheap ones.
However there are also more subtle signals, which one can rely upon for short term direction. Below is a good example of such signals.
We can see that on the 8th of October, the market started with quite weak internals. AI was magenta (meaning negative), cash added was negative (although close to 0), directionality negative and rich vs. cheap tickets also negative. Right until point “A” the price action was choppy, cash added was also choppy and close to 0, however AI, directionality and rich vs cheap tickets were all trending up. At point “A” the price in the market tested the lows of the day, cash added tested 0 too, but AI was still trending up and nowhere close to the lows from the beginning of the day, while directionality was also positive putting in a higher low, rich tickets being more positive too. Market rebounded, but came again close to retesting the lows of the day at point “B”. At this point AI was already cyan (showing positive emotion) and with the uptrend quite clearly shown; cash added was positive, went a bit down, but never tested 0, directionality was also in clear uptrend, putting in a higher low; rich tickets had a minimum of the day. After this point, the market never looked back and proceeded to finish very strong. AI and its components confirmed the price action and the day became more of a trend day.
The next day, on the 9th, the market opened strong rallying from the open, however the AI and its components were showing that there is something amiss. Cash added was quite low, the AI itself didn’t turn up to follow the price action, being more flat than uptrending. When the decline happened around 10:00am, cash added went to 0 and slightly below, directionality took a nose dive and tested 0 also, and rich tickets were negative as well. After that the market tried to stage a rebound, AI started to trend up and had quite an impressive upward movement, however this was not confirmed by the AI components, especially cash added to the market which remained subdued and close to 0. Point “C” highlights the fact that although AI was cyan (positive) and trending up, the cash added to market turned negative and remained that way. This is a sign that market participants are optimistic and trying to buy the market, however overall money is being withdrawn which means big players are selling into the optimism. This battle finished on that day as undecided, and the effect was a very choppy market which was not able to move much up or down. It has to be mentioned though that when cash added to the market is negative, that usually trumps the AI, and it could have very well ended with a big down day, if cash would’ve started to accelerate in the negative territory.