Wednesday, January 28, 2009

The Dow TICK ($TICKI): Identifying Pullbacks in a Market Trend

Long time blog readers are familiar with my use of the NYSE TICK as a trading tool. As I noted in today's Twitter posts, today's market was a nice example of strong underlying buying interest among NYSE issues, as measured by the Cumulative TICK. As a rule, it pays to trade in the direction of the Cumulative TICK, as that reveals buying vs. selling sentiment across the broad range of NYSE issues.

In e-Signal, the NYSE TICK goes by the symbol $TICK. Closely related is the TICK measurement that is specific to the Dow Industrial stocks, $TICKI. Here we're tracking how many Dow stocks are trading on upticks vs. downticks at any given moment (the figure is updated about 6 times per minute). Because the Dow stocks trade very actively, TICKI moves much more quickly than TICK. Most traders don't understand TICKI, and few utilize the indicator because it seems so noisy.

As I noted in an earlier post, the Dow TICK is sensitive to program trading, because the Dow stocks are frequent constituents of baskets of stocks. This creates an interesting dynamic between $TICKI and $TICK. We can have situations in which there is program selling of large cap issues, for example, but strong underlying demand for stocks overall. That was indeed the case in today's market. As the chart above depicts, the Cumulative TICKI (a cumulative line of the one minute H+L+C values) danced above and below the zero line during the first part of the day's trade, even as the Cumulative TICK was in a strong uptrend.

What that tells us, as a rule, is that program trading is limited and cannot drag down the broad range of stocks. In such an environment, pullbacks in Cumulative TICKI that occur at successively higher Cumulative TICK levels (and successively higher ES prices) often are great entries to follow the trend. You're letting the temporary program selling move the market lower to give you a better entry on the long side. The reverse is true during market declines: bounces in TICKI in a weak Cumulative TICK and price market often provide excellent entries for shorting and riding the downtrend.

I find that plotting a short-term moving average of TICKI (10 periods on a 1-minute chart) helps filter out the noise and helps traders identify whether TICKI is staying mostly above or below the zero line. It's the pullbacks and bounces in this moving average line--in the context of overall price and TICK strength and weakness--that can create short-term opportunities for nimble intraday traders.