Tuesday, May 15, 2007

Thoughts on a Weak NYSE TICK and Strong Patterns

Monday's trading saw significant selling in the broad market. My cumulative adjusted NYSE TICK reading for the day was the lowest since March 13th. The "stealth correction" that I had noted in the Weblog broadened into more noticeable weakness.

Recall that I utilize the NYSE TICK as a sentiment measure reflecting the willingness of traders to execute at the market offer vs. bid across the broad range of listed stocks. I watch for shifts in the distribution of NYSE TICK readings to alert me to changes in the sentiment of large market participants. Such a shift alerted us to the downside breakout from a narrow range on Monday, and it tells us that sentiment is turning more negative on a short-term basis.

But what does it tell us if the Dow Jones Industrial Average (DIA) rises on a day in which we have significant selling sentiment?

I went back to the start of 2005 (N = 589 trading days) and found 121 occasions in which we hit an NYSE TICK reading of -1000 or less during the trading day. On only 28 of those instances did we see a flat or rising Dow on the day. Five days later, the Dow was up by an average of .92% (22 up, 6 down). That is considerably stronger than the average five-day Dow gain of .20% (346 up, 243 down) across the entire sample.

In sum, when the Dow has held up in the face of selling pressure, we've tended to see further strength in the near term. Of course, I'll need to see a drying up of negative TICK readings intraday and a holding of the Monday lows to act on this pattern. It's the kind of pattern that would lead me to book some profits intraday, but also leave a piece of the position on to catch a larger move.

The best setups are those that combine a multi-day edge with intraday confirmation; clear, conceptually grounded stops (at the Monday lows); and equally clear profit targets (the S&P highs). As any baseball batter knows, if you only swing at good pitches and take enough quality cuts at the ball, you'll eventually make contact and get your hits. With the market weak in the pre-opening action as I write, we may not get that good pitch to hit from this pattern.

But that might lead to another pattern. And an even better pitch.

Sometimes laying off the high outside stuff is the best thing a batter can do.