Chart of the Week November 13, 2004

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Chart of the Week – November 13, 2004
Brett N. Steenbarger, Ph.D.

Two measures followed by the Trading Psychology Weblog attempt to gauge the buying interest of market participants. The NYSE TICK registers the buying and selling activity of all participants across the broad universe of NYSE stocks. Because the distribution of the TICK varies from one time period to another for a variety of reasons (changes in the number of listed issues, changes in the definition of tick size with decimalization, genuine shifts in the buying and selling patterns of traders/investors), I construct an adjusted version of the NYSE TICK that normalizes its values. What this means in practice is that variation of the adjusted TICK from zero reflects heavy buying or selling relative to a lookback period. An adjusted TICK value of +300 in today’s market no doubt means something very different from an adjusted TICK of +300 achieved in 2001.

Unlike the NYSE TICK, the second Weblog measure, the Institutional Composite, is derived from a basket of frequently traded large cap stocks. These stocks are favorites of large, institutional investors/traders and hence reflect their buying and selling activity. The Institutional Composite registers buying and selling in these stocks every few seconds, not on an end-of-minute basis like the NYSE TICK, though I tabulate the measure on a one-minute basis for comparison with the TICK. If the Institutional Composite is stronger than the TICK (i.e., moving to new highs when the TICK is not), it means we are seeing relative buying interest in large cap stocks. Very often, in such a situation, the S&P 500 and Dow Jones Industrial stocks will outperform the secondary averages. When the NYSE TICK is outperforming the Institutional Composite, we generally see the midcap and small cap stocks outperform the large caps.
For this article, I am looking at cumulative values for the adjusted NYSE TICK and the Institutional Composite. In other words, I am adding the one-minute values for these indicators to a running sum to create a cumulative line, similar to an advance-decline line. This tells us, over time, if we are seeing cumulative buying or selling in the market. A quick glance at the two lines tells us if they are diverging—suggesting differential strength between large caps and the broad universe of stocks—or whether they are traveling in step. My working hypothesis is that, when they are traveling in step, we are most likely to see a trending market.
Below is a chart of the recent Cumulative Adjusted TICK:

Notice that, during the very flat period in the market (center of the chart; the red line depicting the ES futures), the TICK Line initially came down, but then began an ascent well before the market broke to the upside. In other words, we saw net buying in the market ahead of the recent upside breakout. Now let’s take a look at the Cumulative Institutional Composite Line for the same period:

Here we see the opposite pattern during the flat period. Initially the line is rising strongly, only to decline during the latter portion of the flat, corrective period. (Note that the Institutional Composite Line is pink in this chart). As we began the upside breakout from the flat region, the Institutional Composite Line turned higher, now in lockstep with the Cumulative TICK Line. (Notice also how the two were in lockstep during the runup to the flat period).
Three applications of this work immediately stand out:

  1. Using the lines for allocating resources to one sector of the market vs. another (large cap vs. small cap), perhaps with a hedging strategy;

  2. Using the lines to define trending periods in the market;

  3. Using the lines to anticipate breakout from established trading ranges.

I will be exploring these applications in future research.

Brett N. Steenbarger, Ph.D. is Director of Trader Development for Kingstree Trading, LLC in Chicago and Clinical 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 a variety of publications. 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 is a core curricular text in psychiatry training programs. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website,

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