Wednesday, November 15, 2006

Trader Short-Term Sentiment Matters

Some of my favorite trading patterns look at the relationship between price change and sentiment to find a short-term trading edge. My preferred sentiment measure for intraday trading is the NYSE TICK. I use an adjusted version of the TICK, which simply subtracts the 100-day average reading from the raw figure, creating a zero mean.

Let's see what that short-term sentiment tells us:

Since 2004 in the S&P 500 Index (SPY), there has been a bullish drift. SPY has averaged a gain of .06% on a two-day basis, with 381 periods up and 337 down.

Now let's divide those occasions into periods when the day's average TICK reading was positive (bullish sentiment) vs. negative (bearish sentiment).

When the two-day Adjusted TICK was positive, the next two days in SPY average a loss of -.02% (187 up, 186 down). There's no bullish drift at all.

When the two-day Adjusted TICK has been negative, the next two days in SPY average a gain of .16% (194 up, 151 down).

What that tells us is that the bullish drift in SPY has been a reversal effect, in which markets move opposite to short-term trader sentiment. Returns are subnormal following bullishness and outperform following bearishness.

Combine that principle with your favorite intraday setups and you can derive a nice little edge, as those who sold cover their shorts and those who bought puke out their longs. Understanding the dynamics of mean reversion is key to trading the current equity index market.


Anonymous said...

Dr. Steenbarger,

I just found your blog about a week ago and I appreciate all the content. It is an excellent resource.

Is there a way that you could break down how you build the adjusted tick?

If it is something that you do not want to broadcast I will understand.

I use Tradestation and I know it can be done but am at a loss for the details. Are you using the Tick or the TickC which I believe is the cumulative tick?

I built a similar indicator in Trade Station but I believe it is just adding up the ticks at the end of a period, (so if your using a daily period and the tick ends the day at +600, that days total would be +600 added to the next day and so on which I believe would be useless)not accumulating the positive minus the negative and giving the net sum of a day or a period and then performing the addition.

Confused? Can you help?

I am new to blogging, I hope my request is not crazy?

Thank you!

Brett Steenbarger, Ph.D. said...

Hi BProphet,

I use the $TICK, the cumulative NYSE TICK reported by NYSE. I average the high low and close for each minute and calculate a multi-day moving average for the past X days. I then subtract that moving average from every current TICK reading. So if the day's TICK readings are above zero, it means that you're getting more lifting of offers among stocks than during the past X days (and vice versa).

I'll be talking about this during my morning session on the 22nd. Thanks for your interest--