In the first post in this series, we took a look at the NYSE TICK and how it measures the moment to moment sentiment in the overall market. We also took a look at a pattern with edge, where buying pressure in the market cannot take prices higher. Eventually, those buyers are forced out of their positions when sellers come in and that takes the market lower. That pattern played out nicely in yesterday afternoon's market, which we see depicted above. My cycle work was looking toppy and I tried to enter short positions in the market three times in the morning only to get stopped out with small losses. Then I saw the TICK pattern play out in the afternoon and left the short position to run, more than making up for the losses, particularly given the overnight action. One takeaway is that our best trades occur when the longer time frame picture and the shorter term market behavior line up. It pays to be patient and wait for that alignment.
In the chart above, the yellow horizontal line represents the zero TICK level and the blue arrows show where net buying (where the moving average line of TICK is above zero) cannot produce price highs. The longer that pattern plays out, on average, the more longs are trapped and end up needing to cover, creating a meaningful move to the downside, which we see play out with the very negative TICK readings late in the afternoon. A good idea doesn't become a good trade unless we see traders trapped going the wrong way and needing to exit positions.
In the third post in this series, we'll look at the TICK in a different configuration and how it can provide upside edge.
Further Reading:
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