Friday, April 20, 2007

Tracking Sentiment Shifts With An Emerging Average

You ever have a song stuck in your head? Anyway, I was humming my favorite version of Britney's song and, whoops, it happened again: I suddenly had the idea of creating a different kind of moving average.

The above chart from Wednesday, April 18th tracks what I call the emerging average for the NYSE TICK (pink line) vs. the ES futures. The emerging average takes the average value of the indicator from the start of the trading day to a specific point in time. Thus, the value for 10:00 AM would be the average TICK from the open to 10:00 AM. The value for 10:01 AM would be the average TICK from the open to 10:01 AM. As the day goes on, you're averaging more values.

The average TICK level over the prior 20 trading sessions was 300. We opened with far less buying interest than that on the 18th, but notice how the emerging average for the TICK stayed strong through the day--even as it remained below the 20-day average. This suggested to me that there was early selling interest, but that that interest was drying up through the day.

A rising or falling emerging average tells us something about shifts in the distribution of the TICK during the day. If the line rises, it means that current TICK values are above their average for the day to that point and vice versa.

By comparing the TICK to its 20-day average (Adjusted TICK), but also by comparing new TICK values to the prior distribution during the day, we can get a good idea for whether buying or selling interest is expanding, contracting, or remaining relatively constant. Ideally, we want to be a buyer when the emerging average is rising *and* the emerging average is greater than the 20-day average value for TICK. We want to think about selling when the emerging average is falling and the emerging average is less than the 20-day TICK.

All of this simply measures shifts in the willingness of traders to execute trades at the bid (bearish sentiment) or offer (bullish sentiment). By noticing the trend (tendency) of traders to hit bids or lift offers, we can get an early reading of directional tendencies in the market.

4 comments:

procol said...

you may be aware of this but you've done a sort of VWAP for the tick.

Brett Steenbarger, Ph.D. said...

Hi Procol,

Thanks; you're absolutely right. I was even thinking of volume weighting the TICK when constructing the measure. It would be interesting to track the TICK vs its VWAP line for very short-term overbought/oversold signals and breakouts--

Brett

gp said...

Hi Brett,

its an excellent and exeptional blog, that you are publishing!

i guess you have been asked this many times, but what software do you use to conduct the marjet studies.

Thanx

georeg

Brett Steenbarger, Ph.D. said...

Hi,

My market studies use raw data from either Real Tick or e-Signal and do all the calculations and charting within Excel.

Brett