Tuesday, April 24, 2007

Making a Friend of the Sentiment Trend

A number of my posts have drawn upon the NYSE TICK as a measure of sentiment among large market participants. Recall that the TICK represents the number of NYSE stocks trading at their offer price minus those trading at their bid prices. When we see sharp rises or drops in TICK, it means that a large number of stocks are simultaneously trading at offer or bid. This most often happens because institutions are buying or selling baskets of stocks.

My most recent trading has greatly benefited from looking at the trend in the NYSE TICK and trading in that direction. For example, I showed how an emerging average of the TICK--assessing how current TICK values compare to the average level up to that point in the day--can help keep us on the right side of large trader sentiment. We can also gauge the TICK vs. its own regression line to track the trend of sentiment.

In the chart above, I've taken a relatively simple strategy. I'm charting a 10-minute moving average of the TICK (pink line) vs. the ES futures (blue line). The red horizontal line represents the average NYSE TICK level over the past 20 trading days.

One thing I look at as the day unfolds is how much time we're spending above or below that horizontal line. That tells me if we have above average or below average buying sentiment during the day.

The second thing I look for is whether, over time, the area above the horizontal line is expanding or contracting. That tells me something about the trend of sentiment. We can see above, for example, that the trend of the TICK was down through much of the morning. That had me leaning to the sell side.

Third, I look at the bounces and dips in the 10 minute average of the TICK. If we get lower high and lower lows, I view that as a trend in sentiment, and I'll use those TICK bounces to sell the market. Conversely, if I see a drying up of the 10 minute average TICK following a meaningful decline--such as happened in mid-afternoon above--I'll use that as a possible occasion to buy.

Finally, the moving average of the TICK also nicely alerts us to those inefficiency patterns I've mentioned in past posts. Those occur when we get readings in the TICK that are above the horizontal red line, but that cannot push price to higher levels. Such inefficiency dominated the morning trade and was a nice tell for a selling strategy.

The last couple of weeks I've focused on refining my morning trading around trends in the NYSE TICK. So far it's been quite promising. Ken Wood of Woodie's CCI Club jokes that, "We don't need no stinkin' prices". He simply trades off patterns in the indicator itself. While I'm not quite to that point vis a vis TICK, I'm pretty close. If we get a bounce that can't push price higher, I'll sell and cover and the next TICK thrust downward and vice versa. Such a strategy does not lead to huge gains per trade--holding times are short--but my win percentage has risen as a result and losses are quite contained. The key is being patient enough to establish an unfolding trend in the TICK and then trading within that larger trend.

6 comments:

BZBTrader said...

Brett:
Thanks for anoher thought provoking study on the TICK. I use a single line MACD (5,20,3) to watch the TICK on 10 minute and daily bars when I am trading the IWM. This is a simple indicator that can be set up on most trading platforms and I find it to be extremely helpful.

Simply Options Trader said...

Hi Dr Brett,
Another excellent piece that summarized how to use TICK to track market sentiment. The concept of lower high/lower low (higher low/higher high) has been useful.

Is timing another factor you would consider too? Would you initiate a trade during lunch hours if you see patterns that you've discussed in this post forming?

Just to clarify: Is the 20 day SMA applied to daily close of TICK? Out of curiosity, is there any reason why you prefer 10 min SMA for TICK?

Thanks

Brett Steenbarger, Ph.D. said...

Hi BZBTrader,

Nice idea re: the MACD of the TICK. Sounds very useful for trading the broad market (IWM). Thanks for passing along--

Brett

Brett Steenbarger, Ph.D. said...

Hi Simply,

I don't trade the lunch hours normally due to low volume. I find the TICK indicator most helpful in markets with good institutional participation.

The 20 day average is an average of the one minute H-L-C TICK values over 20 days.

The 10 min average, I find, accomplishes smoothing while still being sensitive for the short-term trader.

Thanks--

Brett

Timothy said...

Brett,

When you see those divergences how do you know when to enter? I'm asking because the tick is so noisy. I wonder if you enter a buy on a closing up bar or a break of the previous bar's high or something like that.

Brett Steenbarger, Ph.D. said...

Hi Timothy,

I generally buy on weak TICK readings that follow prior TICK strength and that don't bring price to new lows and vice versa. It's a pattern of readings, not a single point of divergence.

Brett