Thursday, February 14, 2008

NYSE TICK: Using Sentiment to Trade Trend Days



I recently began posting intraday setups for daytraders. This pattern is a setup that is common to trend days, as it capitalizes on persistent sentiment extremes.

The top chart is the five-minute ES futures for today's market. The bottom chart is the five-minute NYSE TICK. Note that we see two important lines on the NYSE TICK chart. The first is the horizontal green line, which is the zero level. When the TICK is above this line, we know that more stocks are trading at their offer price than their bid. That tells us that buying sentiment is dominating: traders are sufficiently eager to enter the market that they'll pay up for the privilege.

When the TICK is below the green zero line, it tells us that selling sentiment is dominant. Traders are sufficiently eager to exit the market that they'll settle for taking the bid price.

In a strong, trending market, we'll see the NYSE TICK trade persistently above or below that green line, as buying or selling sentiment remains extreme through the session. It's when we see the TICK oscillate evenly around the green, zero line that we're most likely to trade in a range.

The blue line is a five-minute H-L-C moving average of the NYSE TICK. Notice that, from the very start of the session, the TICK (and the blue line) was predominantly below the green line. Selling sentiment was dominating right out of the gate. With one exception, we could not generate a +500 or greater reading in the TICK most of the morning.

We started the day anticipating weakness from the historical patterns. We opened below the high price from the overnight session. When the sellers began the session hitting bids in force, I waited for the first positive bounce in the NYSE TICK (to make sure it would remain below the overnight high) and then took my short position. A little after 9 AM CT, a market bounce put my position in the red, but sellers again came in before we could break the overnight high. That led me to add to the short position, with the overnight high as my stop.

From there, I stayed short for the remainder of the session, as the moving average of the TICK stayed chronically below the green line for most the day. The idea is that a trend day will close near its lows, so you don't want to get thrown from your good position unless you see a distinctive shift in sentiment. I find the advance-decline line to be helpful here: if declines are swamping advances, the odds are greater that a trend day to the downside is in force.

Many times traders miss a trend day because they didn't get in early and don't want to "chase" markets. The reality is that, as long as sentiment is staying in its trend, there will be plenty of countertrend bounces (or dips) in the TICK that offer fine short-term entries. The key is identifying the trend day early based on persistent sentiment extremes. Rennie Yang's Market Tells service sends out emails based on this very pattern (and indeed he made a good call on today's move); if you have trouble tracking the TICK on your own, that might be a useful aid.

RELEVANT POSTS:

Identifying Sentiment Trends With the NYSE TICK

Trading With the NYSE TICK - Part One

Trading With the NYSE TICK - Part Two

Trading With the NYSE TICK - Part Three
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10 comments:

SSK said...

Thank you Brett for the explanation! I was watching the 1 minute for a bit today with little succsess. I know now what I am looking for more clearly. I look foward to reading the other 3 links. Thanks again, Steve ~SSK~

x said...

It is easy to look back at a day to classify it as trend day but how to identify the day to be a trending one EARLY during the trading session is critical and not that easy.

For A/D line, do you look at NYSE or Nasdaq? And how does futures volume come into play in this case? THanks for this great post.

Jordan

SSK said...

Bravo! What an addition of useful information. I am looking foward to seeing the pattern on a balancing day. Thank you. I really enjoyed hearing you talk about your trade. Good job, nice trade! Best, Steve ~SSK~

Anatrader said...

Brett

I did not stay up to see how SP would behave.

However, after the negative inside day on Friday, SP refused to sell off hard, even posting a decent gain!

The price range has been tightening over the last 3 days and this could signal a change in character.

This morning, I look at MarketDelta and it broke to the downside, although this contracted range may have some volatility.

This is an example of a contraction setup.

I would tread carefully with good timing and proper sizing

kmack said...

Is that a 10MA on a 5m Tick chart? If not, how do I set this up on Tradestation?

Charles said...

kmack,

Here is a TradeStation Easylanguage Code that produces a $TICK MA similar to what Brett shows on his chart:

http://esanalysis.blogspot.com/2008/02/easylanguage-code-for-tick-moving.html

Let me know if you need help setting up the MA Indicator.

Charles

T. said...

Just wanted to thank you for starting this very useful series! it is helpful to see different types of days and also to investigate failed trades to help think about stop loss and trade management.

t.

Brett Steenbarger, Ph.D. said...

Hi Jordan,

I use the NYSE AD line and use volume at bid vs offer (Market Delta) to confirm what I'm seeing in the TICK--

Brett

Brett Steenbarger, Ph.D. said...

Thanks for sharing the code, Charles!

Brett

Ryan said...

Can somebody post code for the cumulative $TICK? That would help.