Monday, October 27, 2008

What the Cumulative Adjusted NYSE TICK Line Is Telling Us


In the chart above, we have a plot of the Cumulative Adjusted NYSE TICK Line (blue line) plotted against the ES futures (pink line). Recall that this line simply adds together the one-minute readings of the adjusted NYSE TICK, much like an advance/decline line (see this post for calculation of the adjusted TICK). As we plunged to intraday lows on October 10th, we made a low in the cumulative TICK line; as we've now moved back to those lows, the line has held at much higher levels in a dramatic divergence. What gives?

The TICK is a measure of stocks trading on upticks versus downticks. It begins its calculations with the start of trading in NY and ends when the NYSE closes. As a result, the TICK does not account for action that occurs overnight, between the U.S. market close and the next day's open.
If we take a look at the S&P 500 Index (SPY) from the start of September, we find that the market lost almost 42 SPY points (approximately 420 ES points). From the start of September up to that October 10th inflection point at which the number of stocks making new lows hit its highest level (see chart), SPY lost 3.29 points between the NY close and the next day's open and lost 34.8 points between the NY open and close. From October 10th forward, SPY has lost 8.46 points during overnight trade and, during the day session, has actually gained 4.8 points.

The cumulative TICK is capturing the fact that buying pressure has been exceeding selling pressure during the day trading sessions from October 10th to the present. Indeed, during that time, the S&P 500 Index--if we look at day session only-- has risen in value. This is a clear shift in regime and suggests that weakness in equity markets from October 10th forward has shifted to the European and Asian markets. That weakness prompts the U.S. market to open lower, but has not led to further net selling initiated in the U.S.

This morning, as of my writing, we're seeing a potential repeat of this same pattern. Markets were very weak in Asia, opened quite weak in Europe, and are trading lower in preopening trading in the U.S. stock index futures. We made new bear market lows overnight in the ES futures but, as I write, are trading about 1.5% above those lows. Should we build value during the regular trading day above these lows, I will be leaning to the long side in my short-term trading, entertaining the hypothesis that, in this change of regime, the day markets in the U.S. have already seen their price lows, even as markets overall (due to overseas/overnight influence) have been weak.

What prompted this little investigation was a simple observation that a growing share of my intraday trading profits was coming from the long side, despite the overall weak market. That makes sense, given that many of my trades attempt to capture swings in the NYSE TICK (i.e., try to follow short-term buying/selling sentiment). I will continue to follow these swings in early action today, with a particular eye toward whether we sustain a positively or negatively sloped cumulative TICK line on the day. That will tell us whether U.S. traders during the day session are using overseas/overnight selling for bargain hunting, or whether they are succumbing to the global market weakness.

P.S. - On a related note, a very recent article just happens to look at overnight stock index futures action as a questionable gauge of day session strength and weakness. The posts below will provide some background on short-term trading and NYSE TICK. I'll send out a Twitter "tweet" during the AM to update how the day's cumulative TICK is behaving. For new visitors to TraderFeed, the Twitter feature provides a blog within a blog containing links to important market themes, news, and indicators. The last five Twitter posts appear on the blog under "Twitter Trader"; the entire list of posts (and automatic, free subscription to the Twitter feed) can be found here.

RELATED POSTS:

Cumulative TICK and Short-Term Sentiment

Trading With the TICK

Trading Breakouts With TICK
.

2 comments:

S.P. said...

great analysis. very timely! I think you're the first to spot a divergence of some kind here.

Globetrader said...

Hi Brett,
if you are interested in building a portfolio from these levels forward and are thinking, that while the worst might not be over, we might have seen price lows, you might want to take a look at this article http://globetrader.blogspot.com/2008/10/investment-plan.html where I discussed the idea of building a portfolio on a monthly basis using a strategy of covered call and naked put selling. The latter backed by your ability to take the shares in case you are exercised of course.
Best regards,

Chris