Friday, May 25, 2007

When Selling Becomes Indiscriminate: What Happens Next?

On Thursday my cumulative Adjusted TICK measure gave a daily reading below -1000. This has only occurred 16 times since 2004. To achieve such a reading, we have to have persistently negative NYSE TICK readings: far below the 20 day average. That means that traders have been hitting bids across a wide range of NYSE stocks--an indiscriminate selling that affects good stocks and bad. Indeed, we saw declining stocks exceed advancers by over 2000 issues on Thursday.

When we've had cumulative Adjusted TICK readings below -1000 in a single day (N = 16), the next three days in SPY have averaged a solid gain of .58% (13 up, 3 down). That is much stronger than the average three-day gain of .10% (468 up, 376 down) for the remainder of the sample.

I will want to see evidence of waning selling pressure--and an inability of negative TICK readings to drive price to new lows--before acting on this pattern. Nevertheless, when selling has become extreme, it's generally been a good idea to look for a bounce. In my next post, I will take a somewhat longer-range perspective on the performance of the Cumulative Adjusted TICK and provide a note of caution.

4 comments:

a8703825 said...

ello!
I cant understand, how you get a cumulative adjusted tick of below 1000 for last thursday.
I want to resume, how I understood, what you are doing when calculating the cumulative adjusted tick:

1) You create an average of all the one minute closing values of TICK of the last 20 trading sessions (days).(or an average of (H+L+C)/3 of the tick-readings??)

2) You substract this average TICK from each one minute closing( or (H+L+C)/3) value of the TICK of the current day - if I understood what you are doing, you call this value the ADJUSTED TICK .
3) If you add up all those one-minute-adjusted-tick-values, you get the CUMULATIVE ADJUSTED TICK (390 minutes= 390 one-minute Adjusted Tick values)

Did I understand those two sentiment - "indicators".
It would be essential for me to know, that I don` t mix up all those "different TICK`S".
Thank you for all your stimulating articles!

Brett Steenbarger, Ph.D. said...

Yes, you have the essence of the method, using the average of H-L-C for each one minute value. The sum is divided by 100 to get to reading of under -1000.

Brett

a8703825 said...

Sorry - one last question:
You get 390 values of Adjusted Ticks a day.
So you can calculate ONE ADJUSTED TICK FOR THE HOLE DAY by averaging those values.

BUT:You add all those 390 values and divide them by hundred to get the CUMULATIVE ADJUSTED TICK for the day.

Brett Steenbarger, Ph.D. said...

Hi,

I sum the one minute Adjusted TICK values and divide by 100 to get the cumulative adjusted TICK.

Brett