|Chart of the Week – March 14, 2004
Brett N. Steenbarger, Ph.D.
The NYSE Composite TICK measures the cumulative sum of the number of stocks upticking vs. downticking at a given moment. It is one of the most reliable short-term measures of buying and selling pressure available. On an intraday basis, movements in the TICK often provide reliable clues as to whether short-term moves are likely to continue or reverse. Breakouts to new high or low levels on the TICK frequently precede or accompany price breakouts with good odds of continuation. Series of new price highs or lows accompanied by less extreme TICK values frequently reverse.
One problem in interpreting the TICK is that the levels that qualify as high and low vary over time. What is an extreme TICK reading in one market may not be extreme in another. For that reason, mechanical trading ideas based on buying or selling on raw TICK numbers are doomed to fail.
That doesn’t mean that the TICK cannot be used for market timing, however. I cumulate the one minute TICK values over several lookback periods and normalize the values so that highs and lows in one time period will be comparable to highs and lows in other periods. The result of these transformations is a TICK Oscillator that I post on the Weblog. It has been one of the better timing measures over the past year in the market.
Below appears a recent chart of the TICK Oscillator. It is a moving average of the normalized NYSE TICK.
In general, you can see that peaks and troughs in the Oscillator tend to precede price peaks and troughs in the NYSE Composite, with a greater lead period during market rises than declines. At present, we sit at a level commensurate with short-term market lows.
The chart also nicely points out that bull markets consist of a sequence of TICK Oscillator peaks and valleys where the extreme points correspond to higher price highs and higher price lows. We can see the reverse in bear markets. For that reason, it is important to monitor bull market situations where TICK Oscillator highs that occur at lower price highs and Oscillator lows that occur at lower price lows. These may correspond to transitions out of the bull market.
Note that this is what happened during the most recent market peak and valley. We saw a TICK Oscillator high that failed to make new price highs in the NYSE Composite, followed by a TICK Oscillator low that marked a price low below the previous trough. I would be a short seller of any coming TICK Oscillator high that occurs below its previous price high.
Used in this manner, the Oscillator can be helpful for both short-term timing and as an intermediate-term gauge of bull and bear moves.
Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for MSN’s Money site (www.moneycentral.com). The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy (American Psychiatric Press) is due for publication during the first half of 2004. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, www.brettsteenbarger.com.