Tuesday, November 25, 2008

Trading With A Short-Term Moving Average of NYSE TICK

I find that a 10-minute moving average of the NYSE TICK removes much of the noise from the one-minute values. In the chart above of Monday's trading, a few things stand out:

1) We can often identify strong days to the upside and downside when the first hour's TICK is persistently positive or negative. This means we have skewed sentiment, with stocks aggressively trading on upticks or downticks. When TICK MA pullbacks can't even go into negative territory, you know that the sentiment is quite positive. That's a hallmark of a trending day.

2) At a glance we can see if the 10-min. MA of TICK is spending more time above or below the zero line, which tells us that the Cumulative TICK is running positive or negative. Consider the possibility of a trend day when we're persistently above or below the zero line in the TICK MA. The moving average of TICK also helps us identify intraday turns in sentiment and trend, when markets shift from primarily above/below zero to primarily below/above. Non-trending markets will generally spend more balanced time above and below the zero level.

3) In a strong market, pullbacks in the 10 min MA of TICK are often good short-term entry points; in weak markets, bounces in the 10 min MA are candidates for selling. I generally find it useful to wait for these countertrend bounces, so as to not get whipsawed buying highs and selling lows. Even in a market that is about to change direction, we'll often get a retest of previous highs/lows after one of these TICK pullbacks/bounces, making it much easier to scratch trades. Good execution counts for a meaningful share of profitability.


Moyo said...

great post Brett...how do you create this indicator. The short analysis here is very powerful in trading

Brett Steenbarger, Ph.D. said...

Hi Moyo,

It's a simple 10 period MA of the 1 min average H-L-C TICK values. All computed and charted in Excel.


Unknown said...

MAs on the tick are a beautiful thing.

I use Hull MAs (which converge faster than regular MAs) at 8 and 100 periods. The latter still lags somewhat, but gives a good idea of where sentiment is headed.

I also put lines at zero, +/- 300, 600 and 1000.

I put audible alerts at +/- 600, as I find sustained values beyond that are unsustainable, but if they stay up (or down) there, you have one heck of a strong move on your hands.

Conversely, if most of the time it is below 300, you're looking at a chopfest.

Also, with the removal of the uptick rule in 2007, seeing strong negative sentiment has become a lot easier. As big players try ever harder to hide their tracks, it's nice to see something become clearer for once.