April 11 Lesson in Trading and Forecasting with the TICK

I had a good question come in this evening which led to this post, clarifying one main tactic to trade (and forecast) with the NYSE TICK.

The question was along the lines of:

“Price and TICK both made a new high today but the bullish signal failed because the market reversed.”

To which I thought,

“No, I didn’t see that.  I saw just the opposite – the TICK worked just exactly as it should.”

It’s a matter of perspective and context.  Let’s see what I mean:

Click for full-size image via Flickr.

Let’s take a quick fly-by of how to use TICK with price.

Generally, you want to see new TICK highs confirm (go with) new price highs.  If so, that’s a confirmation and thus we expect further higher prices yet to come (so, a strategy would be to buy retracements in that context).

Alternately, if you see price pushing up to new intraday highs or new relative highs but TICK is lagging behind, registering lower spike highs, then that is a non-confirmation and you would look to protect profits and look to short any sort of price/trendline breakdown for a reversal play.

So while the original question is correct in the context only of today’s session, the trick is to pull back the perspective/camera to see what happened yesterday and compare the TICK (and price) today RELATIVE to what happened yesterday – or even in a broader context of the last few days.

Let’s take a closer look.

Going into the close of Friday’s session, the SPY rallied up to the $133 key level and did so on the strongest TICK readings of the day – though it’s difficult to call TICK highs of 718 and 838 “strong” (those were the spike highs into the close).

Anyway, price did continue higher into the morning session Monday, but as price rallied up to the $133.40 region, you can see two main points:

1.  TICK was spiking UP to lower levels – the actual high of the day was met with a TICK high of 672.  NOT the picture of bullish domination.

2.  While price was at new short-term swing highs (relative to the intraday chart), TICK was concentrated in the 0 to 600 region (highlighted).

NEITHER of these points paints a picture of bullish confirmation – in fact, the signal is just the opposite:

Bullish Weakness … or Bearish Strength.

Price made one more go at retesting the highs, but TICK stayed under 700 (peaking at 681 on the session) and then the TICK swung quickly to a new intraday low at -842.

Which brings me to another important point – the red highlights.

Notice that I drew a rising trendline at the close of Friday to indicate rising TICK lows.

That trendline broke this morning right out of the gate – and broke again on the way down from the $133.40 intraday high level.

So let’s take another look at this:

1.  TICK highs are not confirming the new morning price highs relative to yesterday’s rally into the close

2.  TICK lows are breaking a rising trendline and registering lower levels, though price is at new swing highs

Taken in conjunction:  Lower TICK highs and also Lower TICK Lows – all while price is 40 cents above the rally into Friday’s close – paints a clearer picture of Bearish Strength / Bullish Weakness which forecasts caution on the bullish side at best, and potential aggression/opportunities on the short/bear side.

And you can see the result of the session – new TICK lows expanding along with new price lows on the session as the afternoon sell-off  forecast – not guaranteed of course – the morning TICK weakness with the new price strength.

For more lessons on trading with the TICK, check out my prior posts:

“Lesson in Trading SPY Intraday with Two Timeframes and Divergences.”

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

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

“How Market Internals Helped You Avoid March 1st Big Gap Trap”

“Lesson on Using TICK for Intraday Reversals (“History Repeating”)

“Comparing the TICK and S&P 500 Highs for 2010”

“Using Intraday TICK Signals to Forecast Reversals”

“When Divergences Really Matter:  SPX at 1,300”

Keep in mind that these lessons – while mainly practiced by intraday index futures traders – are applicable to swing traders as well on the bigger, multi-day frame of comparing TICK extremes (divergences and spikes) to price, as I show frequently in my many “Check on Market Internals” posts.

Corey Rosenbloom, CMT
Afraid to Trade.com

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