Wednesday, February 17, 2010

Midday Briefing for February 17th: Tracking Sentiment With NYSE TICK

This morning I heard from a frustrated trader who was trying to sell the S&P 500 Index in response to the weakness he saw in other markets. While this was a worthwhile idea, it was important this morning to sell the market as part of a range trade, not as part of a trending one. In other words, in the range market, you sell strength above the volume-weighted average price (VWAP); in the trend market, you sell every bounce that stays lower than the prior bounce.

It's tough to get a downtrending market if the majority of stocks are trading on upticks, not downticks. We can see this at a glance with the chart above, which shows one-minute NYSE TICK readings, the zero line (purple), and a 20-minute moving average of the high/low/close values for each TICK reading (blue line).

What we see quickly is that the blue, moving average line is spending more time above the zero line than below. Indeed, the moving average of TICK barely goes negative for the morning. That is a sign that there are not a significant number of sell programs being executed in stocks. As long as that's the case, it is dangerous to sell weakness, as weakness will often correspond to the lower end of a trading range.