Sunday, April 15, 2007

Stock Market Sentiment and Short-Term Cycles

My recent posts have tracked stock market momentum and new high/new low strength as they relate to short-term market rises and declines. This post completes the trifecta by looking at yet another Trading Psychology Weblog measure, the Adjusted TICK, over the period from March 13th through this past Thursday's market.

Recall that the NYSE TICK is a sentiment measure, tracking the number of stocks trading at their offer price minus those trading bid. The Adjusted TICK subtracts from each one-minute TICK reading the average TICK value over the prior 20 trading sessions and then cumulates the resulting values into a single end-of-day index. This index tells us if traders are more or less inclined to buying or selling relative to the recent past. (A zero Adjusted TICK reading thus means that we have an average sentiment level relative to the past 20 days of trade).

Notice that we tend to see a drying up of negative Adjusted TICK values at market bottoms and a drying up of buying at market tops. This very much fits with the momentum and strength data shown in the recent posts. When we have extreme Adjusted TICK readings--positive or negative--there tends to be follow-through of price movement during the following trading session. Very low Adjusted TICK readings--ones that are neither very positive nor negative--are more common during balanced, range-bound market days.

Combining views from the momentum (Demand/Supply), strength (20-day Highs/Lows), and sentiment (Adjusted TICK) measures provides me with a three-dimensional perspective on two crucial market questions: Are we gaining or losing steam to the upside? Are we gaining or losing steam to the downside? Viewed otherwise, I'm attempting to answer the question of whether the market is likely to move directionally (trend) or oscillate around a mean value (bracket).

That is why I post these indicators every day to the Trading Psychology Weblog. It is also why I post key price levels: pivot-based targets and the daily volume-weighted average price. I am using the momentum, strength, and sentiment data to help me handicap the odds of hitting these price targets during the next trading session. Trending markets will break their previous day's high/low and test the R1/S1 target. Bracketing markets will revert back toward the value region represented by the prior day's average price.

Developing a hypothesis about how the market is moving--and then updating that hypothesis with real time measures of momentum, strength, and sentiment--provides at least one good trade idea per session. We'll either take out the prior day's high or low or revert back to the prior day's mean. My personal trading approach is to identify and ride a portion of that move, finish the trading day by 10 AM CT, and get on with the business of life.


Sean said...

Hi Bret,
I see that you use esignal for showing the data. Could you explain how i can compute or find the data of the avg adjusted TICK count for the day, the 20day New Hi/Low and the demand/ supply values you compute on Esignal. I very much like how you show the ES charts with the data. Or if not on esignal how i can mine for this data on my own. Whether you decided to share how you mine for this data and show it on esignal or not. I just want to say thank you for sharing your knowledge for free.

Sean said...

Hi Brett, I should have looked at earlier posts before I wrote. I understand that the New Hi/Lo and the Supply/Demand must be created using a basket of stocks and where they are compared to the Moving Avgs. But can you explain how u find the Daily Adjusted Tick value on esignal or how you compute it on your own and then place it on esignal.
Thx, Sean

Brett Steenbarger, Ph.D. said...

Hi Sean,

The Adjusted TICK is something I compute independently; it's not available through e-Signal. (Although e-Signal can provide the raw data for the computation). I place the data on the e-Signal chart for display on the blog only, by using a graphics program. It doesn't display that way in e-Signal (alas!).


Randy said...

t, I like some of the others want to watch Adj Tick on my own screen. I use Tradestation and am trying to program it. I'm not sure of the terminology you have used to describe it though.... "The Adjusted TICK subtracts from each one-minute TICK reading the average TICK value over the prior 20 trading sessions and then cumulates the resulting values into a single end-of-day index.

So Closing tick - the average close og the last 7800 1 minute bars = 1 variable, and then cumulates. Then you have 7800 values of C-Average,7800 cumulated?

Brett Steenbarger, Ph.D. said...

Hi Randy,

1) Compute the high-low-close average TICK level for each minute over the past 200 trading sessions (approx 7800 values).

2) Going forward, update this 20-day average each minute and subtract the 20-day average TICK reading from each new h-l-c TICK value. This is Adjusted TICK.

3) Keep a one-day moving average of Adjusted TICK. This is the cumulative Adjusted TICK.

I generally trade in the direction of the cumulative Adjusted TICK.