Tuesday, June 30, 2009

TICK Divergences

Click on Chart to Enlarge

The chart above is the TICK. I usually don't go into much detail on this, and there are several different ways I have seen to measure the TICK, to gauge whether it is confirming a trend or diverging. I am going to briefly present one simple way to look at it without having to get too complicated with spreadsheets, etc.

First off the TICK is a measurement of how many stocks traded on an uptick vs a downtick. I believe it is calculated every 6 seconds during the day. So if more stocks traded on upticks during those 6 seconds, then the TICK will be positive, and vice versa. Obviously, when stocks are trading largely on upticks relative to down, that would suggest buying interest, and vice versa. Since most trading these days is computerized "program trading", following the TICK will help you understand what direction these programs are going. For a day trader, they basically just want to go with the prevailing trend of the TICK on any given day. Short-term swing trading like I do for the blog, will want to go with the intermediate trend (10 or 20 day avg.) generally, but also may fade extremes moves away from the averages.

One thing I look for is whether some moving averages of the TICK make new highs when prices do, or if there is a waning TICK, creating a divergence. In the chart above each TICK bar is 30 minutes of trading. Then I have two moving averages which represent the 10 day average of TICK (blue) and the 1 day average (red). In order to spot divergences I typically just look at the red line (1 day avg) and see whether it makes a new high as prices do. I have two nice examples shown recently (with pink trendlines) where the TICK failed to make new highs as prices was moving to new highs. The prior one to today was June 11, which was the rally high thus far. Today there was a very similar TICK divergence, even though prices were up.

While it is yet to be seen whether this will lead to a decline, these type of divergences often lead to some degree of reversal in the following days. At any rate, you are able to objectively gauge that the program buying is less enthusiastic at this higher price than it was a day ago at a lower price. One component of the short-term model I use for the blog trades is a variation of TICK analysis. At times just an extremely high or low average TICK for the last trading day will provide a good time to go against the trend, but divergences after recent extremes are even more powerful in my experience - and that is what we are seeing right now.

So we are in the midst of a Holiday shortened week that is likely to experience low volume and we are also right in the window of the seasonal low in volatility. That may dampen any potential for big moves over the next few days, but it is hard for me to see the market marching much, if any, higher for the rest of the week. We'll see.

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