For those of you who use the NYSE TICK in your intraday trading, it’s very important to understand that the reference  TICK extremes – highs and lows – changes as a factor of market volatility.

What that means is that you can’t just call a +1,000 or -1,000 TICK reading “extreme” – the value of “extreme” cycles up and down over time.

Let’s look at the current reference levels along with the levels that have changed in 2011 so you can get a more accurate reference of what counts as an intraday TICK extreme that you use to factor into your trading decisions.

Click for larger image.

The combination chart above doesn’t show the finer details, so we’ll look next at TICK highs and lows separately to get a better picture.

What we’re seeing is the Dow Jones Index (could just as easily be the S&P 500 or other leading US Equity Index) on the top and a special custom indicator below that shows the 20 day simple moving average (in histogram form) of the intraday TICK highs and TICK lows.

You can see that the average is compressed (under +1,000 for average TICK highs and over -1,000 for average TICK lows) during periods of low market volatility and expanded for periods of high volatility.

Let’s pull it apart to see the data clearer and gather what this all means:

What we’re seeing above is the 20 day average (in histogram form for clarity) of the NYSE TICK Highs.  Remember, this isn’t the plain TICK but roughly a monthly average of TICK highs.

At the start of 2011, volatility was lower and thus the average intraday TICK high was closer to 850 to 900.  That meant that 850 to 900 was the “extreme” intraday TICK high to expect at the time.

Volatility increased throughout the year, as did the intraday extreme level we could expect to find TICK highs.

In fact, the 20d Average of TICK Highs peaked at the end of September at 1,300.   The current average TICK high is 1,139.

Let’s drive home that point.

Some intraday traders use the TICK either as a trigger to enter a new position, or to exit an old (profitable) position with the following logic:

Intraday Price Swings tend to reverse on intraday TICK extremes.

I’ve heard it many times where traders will use the round number 1,000 as their trigger – they’ll put on a short-sale position when they see a TICK reading of +1,000… or otherwise exit a long (buy) position when they see a +1,000 TICK reading flash on their screen.

What the data show above is that using a round number such as +/- 1,000 is insufficient a reference simply because the reference level – what constitutes an “extreme” or “overbought” TICK reading – CHANGES as a factor of broader market volatility.

Traders who fail to understand this concept risk two negative outcomes:

• If the average intraday TICK High is +1,300 and a trader immediately puts on a short-sale when the TICK hits +1,000, the trader has a high probability of being stopped out for a loss as TICK – and price – continue higher beyond the +1,000 reading.

• A trader who uses a +1,000 TICK to EXIT a bullish/long position leaves money on the table in the trade as price continues higher and TICK goes on to peak for the day near +1,300.

A trader who incorporates TICK Volatility – or the fact that intraday TICK Extremes change over time – has a better chance to adapt the strategies to the new ‘normal’ (average) in TICK extremes and thus reduce losing trades and squeeze more profit out of winning trades (using this strategy).

The logic – and data – are similar for negative 1,000 TICK readings on the downside:

We see the same type of situation mirror average TICK Lows as we saw above in average TICK Highs.

The start of the year gave us average intraday TICK Low extremes GREATER THAN -1,000 while the latter part of the year gave us intraday TICK Low extremes LESS THAN -1,000.

The same dangerous logic applies in terms of using -1,000 as your flat baseline:

• Traders who go long at a negative 1,000 TICK reading face significant losses when the average TICK extreme low is -1,200

• Traders who exit short positions at a negative 1,000 TICK reading risk leaving money on the table as price falls lower (and TICK lows expand to -1,200 or -1,300 per the average).

All you have to do is keep a running average of the TICK Highs and Lows on a Daily Basis, preferably a 20-day (one-month) average, which can be done in Excel if you do not have software where you can automatically plot a moving average of TICK highs and lows.

For additional background and prior updates on this concept, see my prior posts:

Updating TICK Extremes for Intraday Traders (June 28, 2011)

“Why You MUST Consider Volatility When Trading with the TICK”

“Research in Behavioral Changes in the TICK Over the Last 10 Years”

Corey Rosenbloom, CMT
Afraid to Trade.com

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What do we see when we look “under the hood” at the market by viewing current Market Internals?

Let’s take a look with the bigger picture and drill down from there:

Click for larger image.

The 30-min intraday chart above gives us the perspective from the recent “Symmetrical Triangle Breakdown” from last week.

New TICK (middle graph) and Breadth (lower graph) lows were supportive of further new price lows during the sell-off.

According to the “Momentum” principle, new internal (or momentum) lows tend to precede future price lows yet to come – you can see how that played out in the chart above.

But no swing lasts forever – Momentum and Market Internal Divergences often clue us in AHEAD of a market reversal which was the case again this time with the Internal Divergences of November 25th’s holiday session.

Look closely to see Breadth turn positive and diverge strongly relative to the new price low under 1,160 achieved on Friday.

This gives a good example of how Market Internals help guide our trading decisions in terms of looking for swing continuation or reversal.

Now, let’s drill down to the 5-min chart to have a closer look at the divergences and see what Internals are saying now:

I’m showing the “Big Three” Market Internals of Breadth ($ADD), TICK ($TICK), and Volume Difference ($VOLD) of Breadth.

Lower timeframe charts often give a clearer picture of what’s happening on a higher timeframe.

We can clearly see the positive divergences in all three Internal indicators at the close of Friday’s holiday session.

Monday – thanks to the ‘good news’ in Europe and with the holiday sales – gave us an initial “power reversal” spike which was confirmed in the Internals.

Again, new Internal/Momentum highs (confirming price) tend to precede future highs, and we see that initial follow-through this morning.

Unfortunately, the “Big Three” Internals are DIVERGING with price as it interacts with the 1,200 key resistance level.

So the current picture is the following:

After forming divergences and reversing back towards the 1,200 target, the S&P 500 is showing internal weakness that we need to be monitoring for any sort of reversal/failure.

That would be the bearish suggestion, though as traders we follow price – everything else just gives us clues of what to expect and how to position/manage risk.

A further price rally above 1,200 – especially if met with confirming (higher) Internals – would be a “Popped Stops” breakaway buy signal that would be expected to continue at least to 1,220’s target, and we’ll see what the picture reveals in Internals if this bullish outcome develops.

If you can do so with your software, continue watching internals relative to these key levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Gold gave us a breakdown sell signal last week in the form of broken daily support in the context of an intraday Rounded Reversal price pattern.

Let’s take a look at these new developments and what levels are key to watch in the week ahead.

First, the intraday “Rounded Reversal” pattern:

First, be sure to take a look at the prior “Fibonacci and Divergence into $1,800″ Update in Gold – you can trace the analysis then into how it played out currently especially in terms of the negative divergences into the $1,800 level.

We can see the bigger picture here as well as how price has played to the downside, breaking one intraday support level to the next (including Fibonacci and $1,700 ’round number’).

That brings us to our current mini-triangle pattern developing between $1,680 and $1,700 with a ‘midpoint’ near $1,690.

Simply stated:

a breakdown under the $1,680/$1,670 level could trigger additional selling to complete the “Rounded Reversal” pattern that is about 70% complete (the target would be the $1,600 level);

otherwise, a breakthrough above $1,700 triggers a “Pattern Failure” signal which may initially lead to a move to $1,740 or beyond.

Of course, there’s more components going on than that, but these intraday levels can be a guidepost to watch in the week ahead.

Let’s now pull the perspective up to the Daily Chart developments:

The Daily Chart allows us to see the broader picture beyond the recent “Rounded Reversal” (or “Arc”) Pattern.

For interesting reference, a successful mini-Rounded Reversal triggered into $1,700’s confluence resistance and completed with a move back to $1,600.

Whether or not the current ‘larger’ Rounded Reversal pattern completes depends on whether buyers step in this week off $1,675 or whether sellers continue the price rout which would likely sell-off back towards $1,625 if not $1,600.

The short-term breakdown sell signal came recently on the collapse under the 20/50 EMA then $1,700 level.

Continue watching these levels to guide your trading decisions.

Corey Rosenbloom, CMT
Afraid to Trade.com

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If you’re following Fibonacci Retracements, these tools have worked well in finding price support during the recent sell-off.

Let’s take a look at two short-term Fibonacci Retracement grids on the S&P 500 and note where these grids converge.

First, the shorter term hourly intraday grid:

Starting with the October 4th low, I’ve drawn a textbook grid to the recent October 27th high, and we see the resulting downward Fibonacci Retracement levels against the “October Rally.”

While price is trading lower in a potential “Rounded Reversal” or “Mirror Image Fold-back” Pattern, price found intraday support at the 38.2% and recently 50% corresponding retracement level (1,209 and 1,183).

Generally, when one Fibonacci retracement level fails, price plays lower to the next level as seen in the chart action above.

While these are the short-term levels – 1,158 being the 61.8% simple target if the 1,180 level fails – let’s pull the perspective back to find another retracement grid to monitor:

This time, we start with the July 7th high and draw to the same October 4th low, only this time we’re drawing an UPWARD retracement grid against the “August Crash” period and October low.

Price turned lower at the confluence of the 78.6% (advanced) level along with the simple 1,300 overhead level which put us in the current retracement phase lower.

Cutting straight to the point, the Bigger Fibonacci grid forms two convergences with the Lower Fibonacci grid:

1,210 to 1,215 (last week’s low)

1,183 (the low for Monday and Tuesday of this week).

The main idea from a trading standpoint is to watch price relative to the 1,180 confluence:

A breakdown here sets up a play for 1,160 or lower, while any upward movement (especially a movement back above 1,200) suggests a stronger rally (perhaps back to 1,250 which was the ‘heart’ of the Triangle Pattern) may be underway.

Be sure to incorporate these Fibonacci Levels into the other methods you’re using for your trading and analysis at the moment to uncover additional confluences.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Let’s take a quick snapshot update of today’s breakdown from the Symmetrical Triangle Pattern we’ve all been watching in the S&P 500 (and SPY).

Today hit the initial downside target, but what’s the bigger picture saying?

Let’s start with the Hourly Breakout:

Take a look at our prior updates this week from the S&P 500 Symmetrical Triangle Pattern for pure-price charts ahead of the breakdown.

The initial downside target was the retest of the key 1,220 or $122 level which occurred on today’s sharp breakout/sell-off under the 1,240 ($124) critical support level.

What occurred was the expected move – that of a ‘feedback loop’ of liquidation from the bulls and short-selling from the bears that took price to the next lower “Decision Point” at $122.

That’s where we find price at the moment – challenging a critical “Make or Break” support level as buyers and sellers push for dominance (and we trade the resolution of the ‘battle’).

Notice the sharp decline in volume during each of the two rally phases – that’s a great example of how volume can lead signals in price (from divergences).

With the initial intraday support target hit, let’s see the Daily Chart to see what support levels still exist:

What a difference one day can make – we closed yesterday atop the key rising Trendline support and 20d EMA at 1,240.

In just a few hours today, the index broke not only under the triangle trendline, but the 50d EMA at 1,224 as well – a powerful development on the chart that warrants our attention.

A slight push lower breaks the market under the “Round Number” support at 1,200 which would be expected to trigger another wave of selling via a Feedback Loop of Bullish liquidation and Bearish positioning (getting short).

Of course, the bulls have a chance to ‘fight it out’ here, so traders should be prepared to act accordingly on what happens at these levels.

We’re specifically monitoring whether Bulls regain the chart and force another mean “Bear Trap” like October 4th… or else Bulls give up, resulting in a potential move back towards 1,120’s support.

Keep on your toes in this rapidly developing situation.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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