Tuesday, November 25, 2008

Trading With A Short-Term Moving Average of NYSE TICK

I find that a 10-minute moving average of the NYSE TICK removes much of the noise from the one-minute values. In the chart above of Monday's trading, a few things stand out:

1) We can often identify strong days to the upside and downside when the first hour's TICK is persistently positive or negative. This means we have skewed sentiment, with stocks aggressively trading on upticks or downticks. When TICK MA pullbacks can't even go into negative territory, you know that the sentiment is quite positive. That's a hallmark of a trending day.

2) At a glance we can see if the 10-min. MA of TICK is spending more time above or below the zero line, which tells us that the Cumulative TICK is running positive or negative. Consider the possibility of a trend day when we're persistently above or below the zero line in the TICK MA. The moving average of TICK also helps us identify intraday turns in sentiment and trend, when markets shift from primarily above/below zero to primarily below/above. Non-trending markets will generally spend more balanced time above and below the zero level.

3) In a strong market, pullbacks in the 10 min MA of TICK are often good short-term entry points; in weak markets, bounces in the 10 min MA are candidates for selling. I generally find it useful to wait for these countertrend bounces, so as to not get whipsawed buying highs and selling lows. Even in a market that is about to change direction, we'll often get a retest of previous highs/lows after one of these TICK pullbacks/bounces, making it much easier to scratch trades. Good execution counts for a meaningful share of profitability.