Tuesday, March 13, 2007

NYSE TICK Volume: Tracking The Sentiment Of Large Traders

My past posts have dealt with the NYSE TICK as a measure of sentiment and the tracking of large traders as a way of assessing market direction. In response to a reader question as to dollar volume flow in the market overall, let's see if we can integrate these ideas.

The integration is with an indicator we can call TICK Volume. Here is how it is derived: Each minute of the trading day, I take the reading of the NYSE TICK by averaging the high, low, and close for that minute. I then subtract from that reading the average one minute NYSE TICK reading from the past 20 trading sessions. That gives me the Adjusted TICK, which is cumulated on a daily basis and summarized as an index in the Trading Psychology Weblog.

Notice that the Adjusted TICK tells us whether we have above or below average tendencies of traders to transact at the market offer (positive readings) or at the market bid (negative readings). This makes the TICK a valuable sentiment measure, as it captures how eager buyers are to enter the market (lift offers) and how eager sellers are to exit (hit bids).

The TICK Volume measure, depicted above from the period December, 2006 to the present, takes the Adjusted TICK one step further by multiplying each one-minute reading by the ES volume for that minute. I cumulate the 1 minute readings into a single end-of-day measure that is positive if there is net tendency to lift offers and negative if there is net tendency to hit bids. We know from research linked above that ES volume is dominated by the largest market participants. By multiplying Adjusted TICK by volume, we weight the sentiment data to reflect what the institutions and large locals are doing.

We can see that, from December through February, the S&P 500 Index (SPY) ratcheted higher, but we saw lower highs in TICK Volume. These divergences were also evident in the data regarding stocks making new highs and in my Adjusted Dollar Volume Flow data. There is a concept in statistics called convergent validity: A measure should overlap other, known measures of that particular construct. The converging findings from TICK Volume, new high/low data, and Dollar Volume Flow suggest that they are capturing a similar construct, which I believe is related to the behavioral tendencies of institutional traders.

Clearly TICK Volume highlights the very negative sentiment during the recent market drop. Note, however, that the bounce in sentiment since that time has been relatively tepid. We have not seen large traders pile into the market, seeking bargains, and lifting offers to anywhere near the degree to which they were exiting the market during the downdraft. That has led me to question the sustainability of the bounce.

Over the past three sessions, we've been in a trading range, oscillating around an average price of about 1416-1417 in the June ES futures. Traders will be watching carefully for breakout moves from this range to determine whether we will see a fresh upleg off the recent lows or a test of those lows. One of the strengths of TICK Volume as a measure is that it captures short-term breakouts in sentiment quite nicely, as it updates each minute. I will be watching TICK Volume carefully to handicap the odds of an eventual breakout move.