Trading With the NYSE TICK - Part Three

In the first post in this series, I showed how the NYSE TICK fits into a common intraday trading setup. The second in the series illustrated how an ongoing assessment of the distribution of NYSE TICK values during the day provides a useful tracking of trader sentiment. In this final installment in the series, we'll take a multi-day look at the value of the NYSE TICK as a trading tool.

For this study, I use the Adjusted TICK statistic reported daily on the Trading Psychology Weblog. This is a daily average of the moment-to-moment TICK readings, adjusted to create a zero mean. As a result, positive numbers mean that there has been net buying sentiment on the day; negative numbers indicate the reverse. The correlation between this daily Adjusted TICK reading and daily price change in SPY has been over .70, suggesting that about half of all variance in price can be attributed to trader activity at the bid vs. offer across the universe of NYSE stocks.

Since July, 2003 (N = 774 trading days), I found 63 occasions in which the S&P 500 Index (SPY) was up by more than 1% on the day. Four days later, SPY was up on average by .07% (35 up, 28 down). That represents no bullish edge whatsoever relative to the average four-day SPY gain of .14% (432 up, 342 down) for the entire sample.

Now, however, let's factor the NYSE TICK into the mix. When SPY has been up by more than 1% *and* the NYSE TICK has been strong (N = 31), the next four days in SPY average a gain of .39% (22 up, 9 down). When SPY has been up by more than 1% and the TICK has been weak (N = 32), the next four days in SPY have averaged a loss of -.24% (13 up, 19 down). Clearly, the TICK makes a difference: a single day's TICK reading has bullish or bearish implications four days out.

How about when the S&P 500 (SPY) is weak on the day? We had 67 occasions in which SPY has been down by more than 1% in a single day since July, 2003. When the SPY was weak and the NYSE TICK was relatively strong (N = 34), the next four days in SPY average a gain of .39% (21 up, 13 down). When SPY was weak *and* the TICK was weak (N = 33), the next four days in SPY averaged a gain of only .03% (16 up, 17 down). Once again, we see that a single day's TICK reading exerts an influence several days out.

Now let's look at the TICK over multiple days. When the adjusted NYSE TICK averages more than +500 over a four-day period (N = 36), the *next* four days in SPY average a gain of .39% (23 up, 13 down). That is much stronger than the average four-day gain of .14%, as noted above. When the TICK averages less than -500 over a four-day period (N = 34), the next four days in SPY average a gain of .48% (23 up, 11 down)--again much stronger than average.

What we see is that very positive trader sentiment over a several day period tends to generate strength over the next several days, but very negative sentiment tends to lead to reversals. The bottom line is that the moment-to-moment lifting of offers and hitting of bids among traders does make a difference--even on a multi-day time frame.