Wednesday, March 25, 2020

Finding Unique Opportunity In The Current Market

Here's a helpful pattern for developing traders looking for edges in the current market.  It's a great way of looking underneath price charts to see what is actually happening in the marketplace.

The key idea is that time of day matters.  The execution desks of the largest trading firms are most active when they have the greatest liquidity.  Liquidity has been in short supply in recent markets, with thin order books.  That means that at the times of day when large traders most need to move size, they're forced to lift offers and hit bids.  That shows up as quite high or quite low readings in the NYSE TICK, the continuous measure of the number of stocks trading on upticks minus the number trading on downticks.  When we see a very positive distribution of TICK readings during early and late session--the two periods of greatest institutional activity--we know that they are actively buying, and we can use short-term pullbacks to ride those waves.

Above we see the one-minute values of TICK for yesterday's market in the top panel, with a pink line showing the zero level and a green line tracking a 10-period moving average.  (Data from Sierra Chart).  In the bottom panel, we see the SPY ETF.  Note the very positive distribution of TICK values during early morning, even when we have a pullback.  Those pullbacks were meaningful buying opportunities for strength through the day.  (Note how pullbacks in TICK in the first 45 minutes of trading couldn't push SPY to new lows and indeed how we stayed above the open.  We saw similar inability of pullbacks to generate new lows during the 11 AM hour).

By tracking TICK during key periods during the day, we can see if buying or selling is dominating and we can determine if buyers or sellers are becoming more aggressive from minute to minute.  In relatively illiquid markets, it's more difficult for participants to hide their intentions.  That becomes a subtle source of edge for savvy traders.

Further Reading: