Saturday, April 04, 2009

Buying Pressure, Selling Pressure, and Stock Market Reversals

Recall the recent post in which I outlined the importance of recognizing significant selling pressure in the market by monitoring extreme values of NYSE TICK. In the chart above, a five-minute chart of the early trade in the ES futures (dark blue line), I've overlaid the highest NYSE TICK value for the five minute periods (pink) and the lowest TICK values (yellow).

What we're doing is treating these as separate distributions, with the high TICK representing buying pressure and the low TICK representing selling pressure for that time period. In general, values above +800 represent significant buying pressure; values below -800 represent significant selling pressure. When we get periods in which neither buying nor selling pressure is significant, we tend to see quieter, range action.

Notice that, early in the day, we had significant selling pressure, with many low TICK readings falling below that -800 threshhold. Up to 10:30 AM CT, moreover, we had no high TICK readings exceeding +800.

Observe, however, that as the morning unfolded, we were seeing successively higher low TICK readings (light blue arrow). This was our first clue that selling pressure was drying up. The drying up of selling, though, is not enough to stimulate a rally. For that, we need an influx of buying. We saw that around 10:35 AM CT, when the high TICK broke above +800 for the first of several times.

This breakout in the distribution of TICK (labeled in light blue) indicated to us that new institutional buyers were entering the marketplace. To sustain values above +800 (or below -800), we need broad-based buying (or selling) of a wide range of stocks, and that buying or selling needs to be simultaneous. That can only occur when institutions are transacting large baskets of stocks in a directional manner, so that all those stocks are trading on upticks (or downticks).

Note that when our next bout of selling occurred around 11:45 AM CT, we neared but did not quite reach the -800 level. Subsequent selling once again began to dry up (second light blue arrow) and price held well above its morning lows. Moreover, even during this period of selling, note that we had a couple of significant buying readings (above +800) and that the ratio of buying to selling values was higher than it had been earlier in the morning.

In short, the sellers could not push price lower and could not make buyers go away. As a result, we saw another upside breakout in TICK around 12:50 PM CT, with price breaking above its opening level. That reversed morning weakness and set us up for an afternoon rally. Those who caught the shifting dynamics of buying and selling pressure during the morning were well poised to take advantage of the afternoon strength.

Is buying pressure increasing or decreasing over time? Is selling pressure increasing or decreasing over time? How is the ratio of buying to selling pressure changing over time? How is price responding to shifts in buying and selling pressure?

There are many good questions that we can ask during the trading day to catch market reversals.


Nifty Addict said...

Mr.Brett Great tool,Great analysis.Wish i find a tool like yours for the India market.

nonickname said...

Dr. Brett,

As always, thanks for your great posts.

I have a quick (?) question if you have a moment in your surely busy schedule:

In what context should one interpret an extreme (-1000) negative tick reading (or vice versa) as a sign of weakness vs. a sign that the market is temporarily oversold and setting up for a bounce?

Thank you very much.

Jamie said...

Nice post - out of interest, where do you get your historical $TICK data?

xena said...

Hello Brett
I use Sierra charts and was wondering if you manually took the highest and lowest reading of the tick to do this chart? I am not great with using Sierra yet but wondered if one could just pull up this data?
Thank you