A Look at the TICK
If my quote provider only allowed me to use one indicator, I know hands-down which one I'd choose.
I've been asked, if I was stranded on a desert island and could choose only one technical indicator with which to have with me, what would it be?
Today we're taking a look at the TICK.
What is it?
Every trade on each U.S. exchange is stamped and recorded, either by hand or computer, and those trade details are forwarded to countless firms that slice and dice the data for dissemination to clients and the public.
All of us can see limited amounts of this data for free at places like Yahoo! Finance, or more comprehensive analysis via platforms like Thomson, Bloomberg, Tradestation, etc.
There are innumerable ways to parse the nuggets of information to glean insights as to who is doing what in the market, and institutional firms that pay gobs of money to data providers and programmers are able to see nuances that are far beyond what us mere mortals get to see.
An "uptick" is defined as a trade that was executed at a price higher than the one immediately before it. So if IBM traded at 82.37, then again at 82.39, it would be considered to be on an uptick. If it trades again at 82.39, then it would be on a "zero plus tick" – some quote vendors include those trades in their TICK calculations, and some don't.
On the NYSE, the TICK normally ranges between -1000 and +1200. On the Nasdaq, the range is usually between -1000 and +1000, meaning that it is rare to see more than a third of all stocks trade in the same direction at approximately the same time.
Why should we follow it?
The TICK is one of the most versatile indicators available to the public. It can be used as both a trend-confirmation and a counter-trend tool. It works effectively in all time frames, from intraday to weekly, using very basic analysis. It is reported on a "real-time" basis, though that is a misnomer – there is an inherent delay built into these readings, but it is slight and not enough of a hindrance for all but the shortest-term of scalpers.
On a very short-term time frame, traders can use the TICK to fade extremes. When the measure on the NYSE hits +1200 or higher, we almost always see the market back off temporarily, so some quick-fingered traders will use that as a signal to short the S&P futures and scalp a point or two – with the knowledge that such high TICK readings can also indicate demand coming into the market, and stocks have a fairly good chance of continuing higher after a brief respite.
On a longer time frame, the level at which the TICK closes each day usually sums up the trading day pretty well, and can be a good indication for how the market will continue to trade. By averaging or summing these closing figures over a period of time, we can get a feel for how exhausted market players may be. As this running sum increases, showing sustained buying interest, the market usually rises until this sum hits an extreme. At those extremes, the market often reverses, particularly if there is a divergence with price as shown in the chart below.
What are the challenges in using it?
Market dynamics are always changing, and as a result our indicators change too. Program trading, automatic buy and sell orders that make up 25% or more of daily volume, are one dynamic that has made the TICK more difficult to analyze.
On an intraday basis, we often see the TICK swing to wild extremes in the matter of a few seconds, which is a sign that a program or two hit the tape, and not necessary that a bunch of investors suddenly flooded the market with their orders.
Beginning in 2002, the range of the TICK expanded considerably – prior to then, it was relatively rare to see a TICK reading less than -1000 or greater than +1000, whereas nowadays one or the other is exceeded on a daily basis.
As noted above, there is a delay and some inconsistency with how the TICK is reported. Ask five people what the day's high was in the TICK, and you're liable to get five different answers. My thought on that, however, is that as long as you are consistent in your historical comparisons, it doesn't really matter which quote provider you use to get the information – just don't skip from one quote platform to another and expect to see comparable readings.
What does it look like?
We have not seen very many large positive closing TICK readings lately, as the chart above shows. Despite the push to new highs in the broader market, the closing TICK values have been subdued or even negative.
This has created a divergence between the 10-day sum of the TICK and price itself. Other divergences are highlighted with red lines, though you'll notice one positive divergence (green lines) at this time last year, when the S&P dove to new lows while the TICK made a higher low.
Sometimes this will happen just because of how the indicator is constructed, but even given that weakness, it has proved to be an effective guide at extremes and when divergences are apparent. The current situation suggests that buyers aren't all that interested in chasing prices higher, and by looking at previous occurrences, it tells us that weakness may be the likely result.
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