TRADING Strategies

INTRADAY trading with the TICK

Indicators such as the TICK can reveal the internal strength
(or weakness) of the market and highlight intraday turning points.
Here’s how one trader combines the TICK with support and resistance
analysis and retracement levels.

BY CHRISTOPHER TERRY

T
FIGURE 1 TICK AND RESISTANCE
he TICK is a market breadth The TICK indicator moved into overbought territory as SPY tested its
indicator that measures the resistance zone. The combination of these signals set the stage for low-risk
difference between the short trades. The second short sale was also supported by the divergence
number of New York Stock that occurred between the higher price high and lower TICK high.
Exchange (NYSE) stocks trading on an
S&P 500 Index Trust (SPY), one-minute
uptick (i.e., last price higher than the Protective stop
previous price) and the number of stocks 108.80
Protective stop Go short
Short-term
trading on a downtick (last price lower 108.70 double top
than the previous price). 108.60
For example, if at a given moment Go short
108.50
5,200 NYSE stocks were trading up from
their previous prices and 4,800 were 108.40
trading down from their previous prices, 108.30
the TICK reading would be +400 (5,200-
108.20
4,800). The TICK indicator should not be
confused with the term “tick,“ which is 108.10

used to describe a minimum price fluc- 600.00 TICK Overbought

tuation.
Positive, rising TICK readings are a
bullish signal; the opposite is true for a
negative, declining TICK. (However,
very high or low TICK readings often
indicate temporary market exhaustion.)
A declining TICK in a rising market
indicates stocks are beginning to trade
off their highs, signifying the uptrend
may reverse, at least temporarily.
Likewise, a rising TICK in a declining
market indicates stocks are starting to
trade off their lows, and a reversal of the
downtrend is possible. For more infor-
mation on the TICK, see “TICK basics,”
p. xx.
400.00 Overbought
200.00
.00
-200.00
-400.00
9:42 9:55 10:08 10:21 10:34 10:47 11:00 11:13 11:26 11:39 11:52 12:05 12:18 12:31
Source: TradeStation Platform by TradeStation Group
When confirmed with other tools,
TICK readings can be used to identify TICK overbought and oversold levels
intraday turning points. We’ll look at a can vary depending on conditions. For
few examples that combine the TICK the purposes of this article, a reading
with price patterns and Fibonacci above +500 indicates an overbought con-
retracement levels. dition and a reading below –500 indi-

2 www.activetradermag.com • April 2002 • ACTIVE TRADER

 FIGURE 2 BULLISH TICK DIVERGENCE
SPY made a lower low but the TICK made a higher low, indicating growing
internal strength. This divergence was followed by a quick rally.
114.70 S&P 500 Index Trust (SPY), one-minute
114.50
114.30
114.10
113.90
113.70
Protective stop
979.00 TICK
600.00
200.00
-200.00
-600.00
10:10 10:45 11:20 11:55 12:30 13:05 13:40 14:15 14:50 15:25
Source: TradeStation Platform by TradeStation Group
cates an oversold market. Readings
above +1000 or below –1000 are extreme
conditions.
A simple trading approach is to place
trades when the TICK signals an over-
bought or oversold market as price is
testing the support or resistance levels of
a trading range.
Figure 1 (opposite page) is a one-
minute chart with a resistance zone
around 108.72 to 108.90 (established by
the two highs at the far left of the chart).
As the market traded into this resistance
zone around 10:40 a.m., the TICK moved
above +500, signaling an overbought
market. Price then traced out a very
short-term double top, and the TICK
indicator turned down. A short sale
would have been placed when price
dropped back below the 108.72 resist-
ance level. A protective stop would be
placed just above the high of the double
top, which is the top of this swing move.
TICK divergence setups (as described in
the book Street Smarts by Laurence
Go long
11/23 10:25
Connors and Linda Bradford Raschke)
are probably the most popular use of the
TICK indicator. Divergences between
price and the TICK occur when price
makes a higher high (or lower low) and
the TICK makes a lower high (or higher
low). These signals often accompany
market reversals or corrections.
Approximately an hour after the first
trade in Figure 1, price again retested its
intraday highs at the upper end of the
resistance zone, and the TICK exceeded
+500. However, this TICK overbought
high was lower than the previous TICK
overbought high. This divergence
between price and the TICK meant the
market was rallying with fewer stocks
making upticks — a sign of internal
weakness — and set up another short
sale opportunity when price dropped
back below the lower resistance level.
In the case of a long TICK divergence
signal, price makes a new low but the
TICK indicator makes a higher low. In
Figure 2 (above), price fell to a new low
at approximately 1:05 p.m. but the corre-
sponding TICK low was higher than its
Key terms
Breadth: The “internal” strength
or weakness of the market — that
is, the strength or weakness not
immediately reflected in price.
Breadth is typically derived from
some calculation of the number of
advancing stocks vs. the number of
declining stocks, the volume of
these stocks, or some combination
of the two. In addition to the TICK,
breadth is reflected in such
indicators as the advance-decline
line and the TRIN (Arms Index).
Fibonacci retracement:
Percentages based on ratios of
numbers from the Fibonacci
sequence (see Technical Tool
Insight, p. xx) that some traders use
to determine likely retracement
levels and profit targets. The most
commonly used Fibonacci
retracement percentages (rounded
off) are 38, 50 and 62 percent.
previous intraday low at 10:45 a.m. A
long trade would have been entered
when price traded back above the first
low just below 113.70, with a stop placed
below the most recent low.
In addition to its usefulness in trading
ranges, the TICK can also set up trades
in trending markets. In a strong uptrend,
any countertrend movement is usually
marked by the TICK fluctuating
between –100 and +100. In these situa-
tions, –100 becomes the oversold level.
More often than not, the TICK tests the
zero line. These tests offer opportunities
to enter in the direction of the prevailing
continued on p. x

ACTIVE TRADER • April 2002 • www.activetradermag.com 3

 FIGURE 3 PULLBACK 1
A move by the TICK below zero coincides with a 50-percent retracement trend.
of the earlier upmove. The TICK then moves back above zero, and a long At the beginning of Figure 3 (left),
trade is triggered when price breaks above the upper channel line. SPY was in an uptrend and the TICK
reached an overbought level of +600,
108.60 S&P 500 Index Trust (SPY), one-minute which indicates a strong, uptrending
market. In such a situation, the goal is to
108.40 buy on a pullback.
Previous high is used as profit target
108.20 Countertrend channel lines are drawn
as price turns down a little after 10 a.m.,
108.00 forming the pullback. As the TICK
38%
107.80
dropped below zero twice between ap-
Go long on move 50%
proximately 10:11 and 10:30 (and below
above channel line 62%
107.60 –100 the second time), price tagged the
Price bounces off 50 percent Fibonacci retracement line.
107.40 50% retracement line. The combination of the TICK oversold
signal and the 50 percent retracement
TICK made the odds good for an up move.
700.00
This next development to look for is a
500.00 move above the upper channel line,
300.00 which would indicate the pullback has
100.00 ended and price could continue in its
-100.00
previous direction. When the upper
TICK below -100 channel line is penetrated, go long with
10/22 9:45 9:58 10:11 10:24 10:37 10:50 11:03 11:16 11:29 11:42 11:55 12:08 12:21 a stop below the low of the entry bar.
Source: TradeStation Platform by TradeStation Group Take profits at the previous high.

TICK basics

T he TICK is a very short-term (intraday) indicator

that measures the bullish (upticking) or bearish
(downticking) activity in NYSE stocks throughout
the day. TIKI is the symbol for the same indicator calculated
on Dow Jones Industrial Average stocks; some data services
also supply the TICK calculated on Nasdaq stocks.
The TICK is a breadth indicator that gives traders an intra-
day look at the “internal” strength or weakness of the mar-
ket — that is, the strength or weakness beyond whether the
overall market is up on a point or percentage basis. By com-
paring the number of stocks advancing to stocks declining,
the indicator reflects the market’s up or down momentum at
a given moment.
For example, if the S&P 500 index is up marginally but
downticking stocks are consistently outnumbering upticking
stocks (and the number of downticking stocks is increasing,
reflected by a downtrending TICK indicator), it is likely that
only a relative handful of strong stocks are propping up the
overall market. When buying completes in these stocks, a
down move may result.
Two contrarian uses of the TICK indicator are to look for
divergence between price and the indicator, and to use high
or low TICK readings to identify momentum extremes (simi-
lar to how many traders use oscillators like the relative
strength index or stochastics to locate overbought and over-
sold points).
A divergence occurs when price makes a new high (or low)
but the TICK makes a lower high (or higher low), failing to
confirm the price move and warning of a slackening of
momentum and potential stall or reversal. A similar phe-
nomenon would be a steady trend in the TICK that runs
counter to the trend of the market. Extreme high or low
TICK readings sometimes accompany market climaxes.
Because the TICK is a snapshot of the market at a given
moment (and is thus very volatile), it can be deceptive.
Because of this, the TICK is commonly smoothed with a 10-
period moving average to remove some of the “noise” and
better reveal the indicator’s direction and patterns. For a
more detailed discussion of TICK indicator basics, see
Indicator Insight, Active Trader, March 2001, p. 112.

4 www.activetradermag.com • April 2002 • ACTIVE TRADER

 However, patience is required when
trading this setup. The TICK should be
FIGURE 4 PULLBACK 2
given time to bottom out in an uptrend
or top out in a downtrend; don’t expect In this pullback, price retraces to the 38 percent line. The previous high
a sudden price reversal when the TICK provides a price target for the trade.
indicator simply hits the zero line.
S&P 500 Index Trust (SPY), one-minute
Other technical factors should be con- 114.00
sulted before entering any trades, such
113.50
as employing a price pattern, as pre-
sented here. 113.00 Go long
Figure 4 (top, right) provides a simi- Profit target
lar example. It shows a very high TICK 112.50
reading of +900, although price contin-
112.00 38%
ued to move higher. At around 2:20 50%
p.m., price retraced approximately 38 111.50 62%
percent (another Fibonacci retracement
level) and a countertrend channel 111.00
formed. A buy signal occurred after the
900
TICK
TICK crossed back above the zero level
and price broke out above the upper 600
channel line. After that, the stock
resumed its uptrend, including a gap- 300
up open the next day.
0
However, there are times when the
Oversold
market is trending and the TICK does
12:20 12:50 13:20 13:50 14:20 14:50 15:20 15:50 11/13 10:05 10:35 11:05 11:35
reach the overbought (+500) or the over-
sold (-500) levels. In Figure 5 (bottom, Source: TradeStation Platform by TradeStation Group
right), SPY and the TICK both made
new lows around 10:15 a.m. The TICK
broke below –200, at which point a
FIGURE 5 GOING WITH THE TREND
slight countertrend rally ensued in SPY.
A combination of bearish indications A retracement close to the 38-percent Fibonacci level and an overbought TICK
signaled a short trade: The countertrend reading around +500 set up a short trade in the direction of the longer-term
rally reversed after approaching the 38- trend.
percent retracement level, and the TICK
S&P 500 Index Trust (SPY), one-minute
rose to just below +500 (on a one- 115.40
minute close basis; it exceeded +500 115.20
before the bar closed), indicating an
115.00 62%
overbought condition. Go short on a 50%
breakdown of the lower channel line, 114.80
38%
with a stop at the high of that bar. 114.60
During an uptrend, look for the same
114.40
setup, in reverse, if the TICK drops to
–500. 114.20
Go short
114.00

113.80
As these examples suggest, the TICK
TICK
indicator should be used to set up or 600.00
confirm a trade, not as a stand-alone 400.00
tool. By utilizing the TICK in conjunc- Overbought
200.00
tion with price patterns, technical indi-
.00
cators, and in the context of the overall
trend and market environment, you can -200.00
make better buy and sell decisions. Ý
9:33 9:40 9:47 9:54 10:01 10:08 10:15 10:22 10:29 10:36 10:43 10:50 10:57

For more information on the author see p. xx. Source: TradeStation Platform

ACTIVE TRADER • April 2002 • www.activetradermag.com 5