NYSE Tick - Statistical Analysis
The NYSE provides investors with an internal statistic of the stock market called the TICK. It summarizes the number of stocks that are increasing in price versus those that are decreasing in price from the previous price quote. While many view this as buying or selling, this isn't quite accurate. Although rising prices generally mean that there are more buyers than sellers an uptick, or a postive change in price from the previous price, can result from a number of transactions.
For example, if you're interested in buying the stock you place your order and the specialist or market maker then executes that order. If it's a market order to buy, then you have given the broker the permission to buy the stock at the next available price. Now, in order for your transaction to be completed someone must be willing to sell you their shares. The question as to who that source of the shares is lies within the specialist's or market maker's order book. If no one is interested in selling shares at that moment then the specialist or market maker will need to sell you stock from the company's available supply. As you can imagine, if there is no supply or the supply of stock is low when there is strong demand, then basic economics dictate that prices should rise. The only problem is that the small investor has no access to this information. Only the specialist or market maker knows how many shares are available to trade. So the broker finds you a seller or a source of shares to purchase and your order is filled. In summary, as the price rose you were the buyer but someone else was a seller. That's why an uptick doesn't represent buying. It only represents the net number of stocks rising in price versus the net number of stocks declining in price. However, many technicians refer to a rising tick as buying and a declining tick as selling. This isn't correct.
Typically the closing tick is analyzed and used by technicians to look for market tops or market bottoms. As the graph below shows you, the daily closing tick oscillates wildly and hasn't produced much more that identifying extreme values which are used by technicians as clues to a market top or bottom. But as the data show, there is still a fair amount of variability in interpreting these extreme value. In addition, the graph below overlays the 65 day simple moving average with the +2 / -2 standard deviation bands so that the extreme values can be precisely defined. These bands help technicians to look for a specific number. Generally in the past, ticks greater than +1000 or less than -800 were used to spot excessive optimism or pessimism. But as the data show, these extremes can occur in the middle of a trend rather appearing at the end of a trend. So this internal market statistic has limited statistical value as a predictor despite it's prevalent use. A technician could manipulate these data to show rate of change or some apply some other mathematical formula to this raw data but its predictive value will still be limited.
So I asked myself how can I use the NYSE's tick to show something more meaningful and reliable. Well, the answer to that is in applying some basic statistics to the daily quotation of the NYSE's tick. The first step was to use the entire daily quote and create a rather unconventional chart. Rather than producing a bar chart or a candlestick chart, I plotted the intraday high tick separate from the intraday low tick. You should note that the daily closing tick isn't plotted because of the reasons already cited. Below is a graph that shows you the daily intraday high and low ticks along with its differential. Then I plotted the linear regression for each. These regression lines help in highlighting the cyclic nature of these plots. You can see that these intraday highs and lows swing dramatically and typically bounce from edge of the range to the other. What became apparent is that extreme intraday high ticks are not mutually exclusive from extremely low intraday ticks. As a matter of fact, there are many days when the tick's intraday high and low are at extreme levels. This raises the question as to how can we on the same day experience an enormous amount of optimism and pessimism simultaneously, and how does this conflict with traditional views and explanations of how the market reacts on any given day? And although I didn't find a strong correlation with these plots, the observation that a new interpretation of the tick was needed. Sure there are days when the tick's intraday high and low made sense. For example, if the SP500 closed +20 higher from the previous session and the NYSE tick's intraday high was 1000 and the intraday low was -200 that made sense, but if the SP500 closed +20 higher and the NYSE tick's intraday high was 1000 and the intraday low was -1000 that didn't make sense. How are prices able to move higher despite an apparently high amount of pessimism? The problem is that the intraday swings in the tick are so large as compared to years ago they produce many false signals for trading.
So what if we total the last 4 days intraday highs and intrdays lows. Perhaps that would smoothen out these swings. And if fact it does. Below is a graph that illustrates how an oscillator can be created to identify extreme optimism and pessimism. By overlaying the 4 day sums with the SP500 futures daily close, you can see the two extremes converging and diverging from each other. And you'll even notice that there were three occasions when the two extremes (intraday highs and lows) overlapped each other. Notice that these overlapping periods occurred at each of the major market lows. Currently (6/27/03), the intraday highs and lows nearly touched before diverging quickly again.
In addition on the graph is my Tick Oscillator. While the graph shows you the sum of the 4 day intraday highs and lows, I applied the same calculations to other periods as well. In addition to the four day period, the three day period and the five day period were also evaluated and showed the most reliable results. Then the 3,4,5 periods were combined to produce the oscillator. Notice how it quite accurately identifies market lows and highs. As you can see, this oscillator doesn't tell us what the extent of the next move but it does identify for us short term optimism and pessimism which helps us to find entry and exit points into the market.
To summarize thus far, the closing tick despite being widely used can only identify a few days every quarter or year that are extreme and produce warning signs for investors. But in spite of these warning signs, their accuracy is less than optimal for reliable trading results. So, I used the daily tick quote in a non-traditional manner and created an oscillator that uses "fuzzy logic" to combine the computations of the 3, 4, and 5 day sum totals of the tick's intraday highs and lows. By smoothing these extreme values and comparing them relative to each other, the cyclic nature of optimism and pessimism expressed by the NYSE's tick can be measured.
Now let's ask another question, how can we anticipate how the market is going to react to to previous highs and lows? Well, if it were possible to measure the level of optimism and pessimism at those moments then compare those levels to previous critical conjunctures, it might be possible to predict future reactions based upon past observations. If you were talking abour your friend, then you would be talking about his/her personality. So, the question is it possible to observe the market's personality?
Intraday High Tick
Now let's examine the intraday NYSE Tick highs more closely. To begin, a basic statistical study was performed to observe any patterns and variability. The graph plots the 65 day simple moving average of the intraday daily high tick along with the 65 day standard deviation. In addition, the plus and minus standard deviation bands are plotted around the moving average. And for those curious, the reason for the 65 day moving average was chosen because it represents 3 months of trading or one quarter.
The reason for this study was to explore how stationary the series is. Because if the series had the charateristic of being stationary then other more complex mathematical forecast modelling could be applied such as ARIMA or GARCH. But as the chart shows, this series isn't stationary due to the upward drift. Second, even the variance or the amount of variability wasn't stationary as the light blue line demonstrates. The actual standard deviation (Stdev) has been decreasing since Jan. 2001 while the average intraday high tick has risen from 500 to 1100. Another point that needs clarification are the plus and minus standard deviation bands (+1 std / -1 std). To refresh your memory, these represent 68% or two-thirds of the values. It would be the same as saying 44 of the past 65 days lie within the +1 and -1 standard deviation band. Or in other words, if the intraday high tick is between 1280 and 940 then that's a normal day for the stock market. But the intraday high tick is greater than 1280 or less than 940 then it is more likely to be significant because that value lies in the remaining one-third of all possible values. Now if you wanted to identify extreme values of the intraday high tick then statisticians would begin by looking at values that lie outside the range of the +2 / -2 standard devations from the average intraday high tick. By using the 2 standard deviations, this would mean that you would exclude 95.4% of all possible values and you would only be interested in only 4.6% of the prices. Put another way, this means that only 3 days in the past 65 had extreme values that would interest you. So if the +2/-2 standard deviations bands were plotted then you would be looking at intraday high ticks greater than 1448 and lower than 770 for 7/3/03. Note that these would not the extreme value for Jan. 2001 as the variability is different along with its lower average value. The range for Jan. 2001 would be +1002 to -15.
Next, what else can be derived from these basic statistics of the intraday high tick. First, in just two years, the average intraday high tick has doubled from 500 to 1100. This is contrary to what you would expect in a declining market. So naturally one would ask how could this occur? One explanation I heard was that the number of stocks traded on the NYSE is increased. This is true but not to the extent required to double the average value. And after reviewing the NYSE's archives, the number of issues traded on the exchange on 12/31/2000 was 3,547 and the current number of issues traded on the exchange 6/30/2003 were 3,603. So this clearly isn't a factor contributing to the significant rise in the intraday tick. Another explanation could be due to the change in century old method of reporting quotations.
On January 29, 2001, the NYSE switched the reporting of stock prices from sixteenths of a dollar to pennies. No longer were stocks represented by eighths or sixteenths. A quote of 55 13/16 was changed to 55.81. So prior to Jan. 2001, an uptick meant a change in the stock's price by 6 cents or at least one-sixteenth of a dollar. Generally, prices moved in eighths so an uptick was more often represented by a 12 cent move in price. After January 29, 2001, an uptick meant a change in price of one penny. So when the exchange moved away from the old system to the new system, not only did it benefit investors by decreasing the spread between the bid and ask to a penny, and by making it easier for the average investor to understand prices (no longer did an investor need to convert sixteenths of a point), it increased the sensitivity of the exchange's internal barometer - the tick. Now all a stock needed to do is change by one penny and the tick changed. This naturally increased the number of stocks changing in price at any given moment and the average tick quickly jumped from 500 to 900 by November 2001. What is interesting to note, is that while the average number of stocks changing in price increased after decimalization, the variability decreased. This means that as more stocks showed a change in price the standard devation decreased indicating that fewer stocks remained unchanged in price. So the pool of stocks contributing the tick's value increased and the range of possible values decreased.
However, notice that during the period of June 1, 2002 and September 15, 2002 the average intraday high tick rose again quickly to a new level. It rose from 900 to 1050. What accounted for this increase in change? This time my theory is that the change in the average tick was due to the rapidly declining stock market. The stock market broke through the previous low set on Sep. 21, 2001 and the number of stocks changing in price increased substantially. Although stock prices were down for most stocks, the ability to record an uptick was now easier since all the stock had to do is increase in price by one penny. Interestingly, the variability of the tick didn't increase as the number of stocks changing in price increased. As a matter of fact, the variability decreased during this dramatic market decline.
The last trending move in the average of the intraday high tick occurred between March 2003 and June 2003. This time the stock market increased in value rather than decreasing the previous time. But again, variability decreased during this period.
So in summary, the range of values in the intraday high tick have changed dramatically over the past two years and so has the interpretation of these values. The basic statistics show that the intraday high tick is a dynamic or constantly changing quantity, and as such, it is wrong to apply static rules to this metric. Perhaps as investors we need a new method for identifying extreme values, and to explore this concept, please read on.
Below is a graph that overlays the SP500 futures daily close with the NYSE's intraday high tick. However, the intraday high tick has been transformed into a statistical Z-score. The value, or importance, in converting the intraday high tick into a Z-score is in identifying extreme values in relationship to the previous quarter's (65 days) average and standard deviation. As we showed you, the average has drifted significantly over the last two years and the variability has also changed. So identifying one extreme level over such a non-stationary period isn't possible. In engineering terms, the period demonstrated non-linearity, so we need to create a quantity that represents the same condition despite varying data. For example, one the reasons percentages are useful is that you can compare the amount of change in relative terms. Twenty percent is 1 out of 5 or 20 out of 100. It means the same thing to everyone. So I have crafted a method to compare in relative terms the intraday high tick over this non-linear period. By converting the intraday high tick into a z-score, we can redefine the range of the intraday high tick and compare these values over periods of varing degrees of variability and differing average prices. A z-score of +2 always means that the value is likely to be found in only 2.3% of a given sample. So this price is within the normal distribution but it is unlikely to occur.
The blue line in the chart below represents the daily intraday high tick as a z-score. This is the data series that is referenced in this discussion. Notice that it is range bound between +3 and -3. That's due to the fact in a normal distribution model, 99.73% of the range of values are between plus and minus 3 standard deviations. So as stated earlier a value of +/- 2 or greater would contain 95.4% of the values and any value outside of this range would be defined as extreme. However, if we chose +/- 3 standard deviations then only 0.27% of the values would be considered extreme values.
This characteristic of being extreme would lend itself to further study to identify any correlation to market direction or price movement, but that study of particular extreme values will not be disclosed here. Like analyzing the daily closing tick and searching for specific days, this isn't were we found much correlation nor accuracy as shown above. So rather than focusing on a particular day, we instead went a step further to create an indicator that attempts to identify periods in which the number of stocks changing in price is extremely high or extremely low. By creating this indicator we're attempting to track a moving target, meaning finding static levels to a dynamic or changing set of conditions. In do so, this might create a stationary series in which more advanced mathematical forecast modeling can be applied. and it we could find a stationary series that contains a static average value and a constant variability, a meaningful forecast could be produced that would be profitable. Applying ARIMA and/or GARCH statistical modelling would then be viable and other studies could be conducted. While I am not attempting to explore how to apply these concepts in this article, I am interested in showing you the indicator and its how you can understand the interpretation of the values.
Below our indicator is simply the 8 day sum and the 21 day sum of the intraday high tick z-scores. Essentially the values plotted by the blue are line are added for the past 8 and 21 days. These totals are plotted and you can see the 8 day sum as being represented by the yellow line. The 8 day period was chosen because it represents a week and a half and the 21 day period was chosen because it represents a month. Notice that each of the indicators, the 8 and 21, are range bound. This is representative of an oscillator because it fluctuates between a range of +/-8 for the 8 day or +/- 10 for the 21 day.
By viewing these indicators, you can quickly see on a monthly and biweekly basis how extreme the intraday high tick has been for given period. And more importantly, the values are constant throughout the entire two years. So a value of +10 two years ago represents the same quantity of extremeness as it does today and will be in the future. Second, you can examine the turning points in the indicators and determine if any correlations exists between price and periods when the intrday high tick is extreme. Third, you maybe able to visualize cycles that become apparent which identify when there will be extreme periods of intrday high ticks.
Since this analysis is of the intrday high tick, it may be important to ask if there are any periods in which there is a correlation between extreme high values of the 8 day or 21 day sums and market tops. Or are the indicators better at identifying bottoms?
Another question that arises in the interpretation of the indicator is whether or not the values represent one or more market mechanisms. For example, look at the zones marked A and B on the graph. During period A, the indicators showed a steady rise in the cumulative z-scores for that period while the market was declining. indicating that we should sell the market when it penetrated the previous lows, and during period B, the indicators indicated to buy the market lows.
During period A, stock prices were declining and yet the number of intraday high ticks reaching extreme levels as defined by their deviation from the sample set (65 day period) was increasing. And like on all occasions before this period, the indicators were extremely high indicating that getting out of the market and selling the market would be the best strategies. However, one could deduce that investors were bidding up prices throughout the day, indicating that there were investors buying stocks as prices declined. These indicators didn't tell us how much buying occurred, but just that investors created extreme upticks. For a measure of how much buying occurred, please refer to our money flow charts and volume studies at NYA Charts. Also notice that as prices declined the indicators rose. The indicators are highly correlated to price. Extreme lows in the indicators occur near market lows and highs in the indicators occur near market highs. However there are some exceptions. So in zone A, investors were extremely interested in buying below the previous low set in Sep 2001 during June 2002 and Aug. 2002, and they bought the dip. So while investors were buying the dip, the indicators told us to get out or sell the market and it wasn't until mid-October 2002 that the indicators had returned to their negative levels when they told us to buy the market lows of Oct 2002.
Now let's examine zone B. During this period, prices were near the previous two market lows and the indicators were also near their lows. This time prices rose as the number of extreme intraday high ticks increased. Once again the indicators told us to buy the market in mid-March 2003. Remember, in zone A as prices penetrated the previous low the indicators were in neutral territory, but the number of extreme upticks accelerated. More stocks were showing a rise in price which when you think about it is easier to do when most stocks are down to begin with. Unlike the summer of 2002, this time the market was near it's previous lows and investors didn't many create extreme upticks. They didn't bid up prices. The number of extreme upticks decreased showing a lack of interest in buying as it approached the lows. So since there wasn't a lot of buying energy expended buying the dip, there was still a lot of buying energy remaining to propel prices higher. Both indicators were extremely negative in value and were in the buy zone. So from March 2003 to June 2003, the market rallied and the indicators told us to get out and sell around the 900 level. Although the indicator correctly identified a buying opportunity it didn't correctly mark the top as it had done in the past.
As you can see, from early April to late June 2003, the z-score values of the intraday high tick are decreasing while the market is rising in price. The 8 day sum indicator reached an extremely low value and the monthly sum reached a value of -6 in late June 2003. This indicates that as the market was rising in price the number of extreme upticks was decreasing, telling us that optimism is waning at these higher levels. Perhaps investors have been selling into this rally which raises a flag as to how much higher the market can go. But if we assume that these indicators are better at identifying market tops than bottoms then these indicators have not yet showed us a top and it will be at least one to two months before we see a top in the 21 day indicator and perhaps as soon as 5 days using the 8 day sum.
In summary, zone A didn't identify an extreme period in the intraday high tick until the stock market reached its previous lows and then told us to sell the market in July 2002 at the Sep. 2001 low rather than buy it. Then the indicators showed us a buying opportunity in Oct. 2002. It told us to buy the market during the Oct 2002 low when the market broke the July 2002 lows and it once again correctly identified the March 2003 low as a buying opportunity. But the indicators failed to give us a buy signal when prices broke above the March 2003 highs around 900 in late April 2003. This is the first time in two years that this indicator failed to warn us of rising prices and produced a substantial loss. But given its previous track record, this sizeable loss, or drawdown, occurred after racking up sizeable profits.
Intraday Low Tick
Now let's analyze the companion to the tick's intraday high - the intraday low. To see the actual intraday low ticks, please refer the chart titled "Intraday Tick", or the second chart displayed on this page. Like the discussion on the tick's intraday high, the following charts are created from the tick's intraday low.
The graph below now examines the intraday daily low tick more closely. Like the graphs above, this graph plots the 65 day simple moving average of the intraday daily low tick along with the 65 day standard deviation. In addition, the plus and minus standard deviation bands are plotted around the moving average. On this graph, the pink line represents the standard deviation and it too decreased in value over the last two years. In addition notice that the moving average of the intraday low tick has remained near the -550 level over the past two years unlike the intraday high tick, which has drifted higher. This series is more stationary than the intraday high tick but it still varies over the two year period.
Below is a graph of the intraday low tick. Like the chart above for the intraday high tick, it overlays the SP500 futures daily close with the NYSE's intraday low tick. And the intraday low tick has also been transformed into a statistical Z-score. Even the colors rerpesent the same data for side by side comparisons of the intraday highs and lows, except for the fact the graph above plots the intraday high and this graph plots the intraday low tick.
This graph compliments the previous graph by showing you how reliable the intraday low is in identifying tops and bottoms. All of the thoughts and ideas conveyed in the above chart apply to the chart below. However in this case, the intraday low tick wasn't as good at finding bottoms nor was it as good at finding tops. Notice how it missed identifying the sell in June 2002 and how it missed the Oct 2002 low as a buy. Also note that it too didn't find the June 2003 top but it did hold on longer for an extra 50 points to 950 versus the intraday high tick's sell signal around 900.
Below is a chart that displays both the intraday high tick 21 day sum indicator and the intraday low tick 21 day sum indicator. This overlay enables you to see how these indicators compliment each other. Remember that during periods of extreme investor optimism, the intraday high tick will be extremely high and the intraday low tick should also be high but in the latter's case the values become less negative. While during periods of extreme investor pessimism the intraday low tick becomes extremely negative or low and the intraday high tick also becomes low in value. Note that there were three periods in which the two indicators weren't sychronized and that was during March 2001, August 2001, and June 2002. In all three cases the intraday high tick rose while the intraday low tick dove. So we have to ask how could stocks make more intraday highs and lows simultaneously? Next we have to ask why did this occur as the market approached key levels?
In March 2001, the market moved lower to 1250 on the SP500 futures by 2/23/01 and both 8 and 21 day sum and indicators were dropping. But then the intraday high tick started to rise while the intraday low tick fell - they were diverging. Looking at the price action, the SP500 was hovering around its lows for a 10 day period until 3/9/01 when it broke lower. Then by 3/23/01 the divergence was at its maximum. The 21 day sum of the intraday high tick z-scores peaked near the sell zone of +10 at the SP500 low while the 21 day sum of the intraday low tick z-scores reached an extremely low level of -17. It appears that investors whipped prices around as the market's prices fell. Although the number of stocks with downticks overwhelmed stocks upticks. There was interest in buying as the market went lower. Extreme upticks were being recorded so it is assumed that investors were buying the dip, the breakout to the downside. Then by April 2001, the 21 day sum of the intraday high tick z-scores and low tick z-scores both rose telling us that stocks making upticks outpaced stocks making downticks.
By August 2001, the market moved lower to 1180 and the market had tested this level which was the same as the high of late March 2001 twice. Both the 21 day sum of the intraday high and low ticks were trending down but had only reached the -5 level. Then the market bounced up to 1220 and then started its decline to the Sep.2001 lows. During the market's drop from 1220 to it penetration of the previous low at 1112.5 on 4/4/01 (a 100 point drop) the intraday high tick z-scores rose to the sell zone +10. The number of extreme upticks was increasing despite falling prices. It is assumed that interest in buying had spiked in anticipation of these levels holding, but prices didn't hold and prices broke the previous low. Once again, by September 2001, both the 21 day sum of the intraday high and low ticks were trending down and reached extremely low levels showing us that investor interest had been exhausted and interest in selling had been exhausted, which gave us a buy signal.
Now let's fast forward to June 2002. Here again a diverging period preceded the breakout to lower lows. In June 2002, the 21 day sum of the intraday high and low ticks started to diverge as the SP500 futures went from 1040 to 981. But once the 21 day sum of the intraday highs peaked at +15, the SP500 had retested the previous low set back in Sep. 2001. Again an extreme amount stocks had upticks during the decline to the lows and indicated that the interest in buying had exhausted itself. But this time, both the 21 day sum of the intraday high tick z-scores and the intraday low tick z-scores were at their extreme levels. Both measures of optimism and pessimism had peaked simultaneously. As it turns out, downticks prevailed and remained constantly near their extremes while the number of upticks waned. Interest in buying decreased to extreme levels by Oct. 2002 and intraday low ticks increased by becoming more negative by the same period. So the market rose and retested the previous highs.
Also note that it appears that every third cycle is a deep low near the -20 level and we're currently in the third cycle which could go into a deep low before indicating a buy. In addition, during the bear market waning extreme intraday ticks has resulted in lower prices, but this time (June 2003) it hasn't. This is the first time that we see in two years that waning extreme intraday ticks hasn't resulted in lower prices, which is telling us something different is occurring. Prices are remaining strong despite the increasing number of extreme intraday low ticks and the simultaneous decreasing of intraday high ticks. This indicates that more stocks are ticking lower in price intraday and that there are fewer stocks making higher ticks intraday. This is the first case of divergence between price and investor participation. Up until June 2003, we have elaborated on the divergences between the number of upticks and downticks but not versus price. As you scan the graph, you'll see that when the indicators move into the -10 to -20 levels prices drop, but not this time. Technically, prices are dropping 30 points off the highs, but in the past, prices had dropped by over 100 hundred points for the same movement in our indicators.
The question that remains revolves around investors. If they are selling above the previous highs set in August 2002 (increasing downticks), and fewer stocks are rising in price (less upticks) then how are prices able to stay so high. Why aren't prices going down? Prices in the past have always declined when these conditions were present. So what's different this time? We don't have an explanation at this time because we haven't found any evidence yet to support a theory. There are plenty of guesses, but all are short of facts. When we do find a reason, we'll be sure to post it. Yet we have to ask; are prices being artificially held up so that Wall Street insiders can unload their shares to the public; or are the investing elite, acting as a cartel, buying up shares off the exchange floor in anticipation of another major bull run to the all time highs? We personally favor the former scenario, and if that scenario is correct, then prices will drop dramatically over the next four months. But if the market is doing its job, then the market is setup to breakout higher. In the past when investors anticipated that the lows would hold, they broke; and when investors weren't interested in the lows they held, and prices rose. Perhaps this time the shoe is on the other foot and the converse it true. If investors are expecting the market to go higher then it won't. And if investors are shorting this rally or unloading their stock then the market will go higher.
The market rallied to breakout above the August 2002 highs, but as prices are rising, the number of extreme upticks and downticks is decreasing. Investors are seemingly taking a timeout at these levels and they aren't participating in this rally. So perhaps in a perverse move, the market will rally from here to attract more interest. And if the past can be our guide then market lows that hold are correlated with extremely low 21 day sum intraday high and low tick z-scores. The only question that remains is whether the 21 day sum intraday low tick z-score has bottomed or is it still declining. Currently (7/3/03), the two indicators are diverging and could be setting up a month long period which will define the direction of the next major move in the market place. And as always, we will need to be patient to see how this plays out.
Final Thoughts
The tick has long been associated with buying and selling strength because it shows us the net number of stocks rising or declining in price. But does the tick measure buying and selling? Over the years the rules that govern the value of a tick has changed and made this metric more sensitive. More stocks now produce changes in price than ever and perhaps the reasons for those changes in price are more complicated than simply buying or selling. With the explosive growth of derivatives that include futures and options, stocks are bought and sold throughout the spectrum of prices. And despite the exchanges downtick rule, ETFs are still able to be bought and sold whether they're upticks or downticks. But regardless as to how the ticks are derived individually, the exchange's net tick shows investors the amount of optimism and pessimism that exists in the market. Tracking this level of investor sentiment provides us with a real and meaningful correlation to prices that is more accurate and reliable than relying on one price, the daily closing tick.
What's remarkable is that by applying some basic statistics to an old familar characteristic of the market, numerous views were generated that explored in depth the personality of the market. We were able to gain more insight as to when the market would be more inclined to sell off or bounce at key levels and therefore substantially increase our odds of success. We found a metric that identifies when the market is prone to breaking out and helps us to setup larger positions with tighter stops and therefore lowers our risk of losses.
While many technicians look for extreme values in the tick, they typically work with the closing tick. This approach has proven itself useful in identifying a handful of days in which extreme values can be used at identifying tops but aren't useful in identifying how the market will respond to previous lows or highs. By looking inside this widely used market statistic and analyzing it's daily extremes, we believe that we can identify intermediate tops and bottoms with greater accuracy based on how much energy has been expended getting there. If a period of extreme upticks occurs then this will dry up and lead to lower prices and conversely if the number of extreme upticks is low or dries up then something will cause it to get started again. We have shown that at critical market junctures, our indicators tell more accurately than most which side of the market to be on.
In addition, the intraday high tick seems to tell the story better than the intraday low tick and we can tell if investors are buying the lows in anticipation of a bounce or if they have lost interest in buying at lows. This allows us to create the following axiom; "when interest in buying previous lows is high, that's when the market will break lower and when interest in buying wanes at lows that is when the lows will hold." This is rather perverse but then again that's the market's job. To borrow a quote from Tom O'Brien a financial talk radio host, "The market's job is to take the most amount of money in the least amount of time." Well, here's proof of how this happens.
As a footnote, if your thinking that an oscillator could be created using the differential of the intraday high and low, we can spare you effort and tell you that it doesn't produce anything more useful than what you see in the charts presented. BTW, the net differential from "Intraday Tick" chart doesn't work as an oscillator either.
During the past two years, prices have responded in a logical manner but during the month of June 2003, prices are not responding as they once did. This disturbing development implies a major turning point, but the direction of this turning point is undetermined at this time.
created 7/3/03, ©2003, The Small Investors Software Co. All rights reserved.