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Stock Index Futures Trading Collection STOCK INDEX FUTURES TRADING COLLECTION “Using the TICK to identify the intraday trend” by David Bean (Active Trader, May 2006). 2 “Counterpunch stock index futures system" by Active Trader Staff (Active Trader, Nov. 2002) 7 “Extreme open-close days” by Xavier Maria Raj (Active Trader, April 2005). 9 “The Fibonacci Swing Filter” by Gomu Vetrivel (Active Trader, Feb. 2005). 13 “Trading the opening gap” by John Carter (Active Trader, Dec. 2004). 17 “Hitting the street: The S&P 500 futures' intraday reactions to economic reports” by David Bukey (Active Trader, May 2005). 21 “Sector vs. index: The single stock futures-Dow spread” by Keith Schap (Active Trader, Nov. 2005). 27 “Trading the basis: How stock index arbitrage impacts the market” by David Lerman (Active Trader, March 2003). 31 “Stock index spreads: S&P vs. Naz” by Keith Schap (Active Trader, May 2006). 35 “The multibar range breakout system” by Dennis Meyers, PH.D. (Active Trader, Jan. 2004). 39 “Following through in the S&Ps” by Thom Hartle (Active Trader, Dec. 2003). 44 “Getting in on follow-through days” by Thom Hartle (Active Trader, Jan. 2004). 49 “Follow-through in the E-Mini Nasdaq 100” by Thom Hartle (Active Trader, Aug. 2004). 54 “Up-down volume and next-day follow-through” by Thom Hartle (Active Trader, Dec. 2004). 60 “E-Mini morning reversal and afternoon breakout patterns” by Gomu Vetrivel (Active Trader, Jan. 2006). 66 “The telltale spread” by Thom Hartle (Active Trader, Nov. 2003). 70 TRADING Strategies Using the TICK TO IDENTIFY THE INTRADAY TREND Analyzing TICK readings over the past five years provides the foundation for an intraday trend strategy. BY DAVID BEAN he TICK indicator measures than previous price). The TICK subtracts prices while 1,500 stocks were trading intraday momentum in the number of downticking stocks from lower than their previous prices, the New York Stock Exchange the number of upticking ones to gener- TICK value would be +500 (2,000-1,500). (NYSE) stocks by tracking ate a momentum snapshot of the market Traders typically use the TICK indicator the difference between upticking stocks at any given time. to gauge the level of buying or selling T(last price higher than previous price) For example, if at 10 a.m. 2,000 stocks pressure throughout the day. If the TICK and downticking stocks (last price lower were trading higher than their previous reading is high, the market is showing “internal” strength, which is different FIGURE 1 FIVE-YEAR AVERAGE NYSE VOLUME (15-MINUTE INTERVALS) from the “outward” price movement. According to popular interpretation, The second-largest NYSE volume occurred in the first 15 minutes of trading, TICK levels that correspond with price which is a good time to determine the daily trend because price moves are action help confirm the market’s direc- more meaningful when backed by large volume. tion, but TICK values that diverge from price can warn of possible reversals. For example, a typical bullish signal occurs when the S&P 500 is climbing when the TICK is positive (or trending higher). However, if the S&P 500 is rising but the TICK turns negative (or trends lower), the rally could be nearing its end. (For more information on the TICK, see “TICK basics.”) From analysis to trading This kind of analysis depends on logical- ly defining “high” or “low” TICK read- ings. The following study analyzed intraday TICK behavior in the past five years to find potentially bullish and bearish TICK levels. However, the resulting trade strategy also relied on NYSE volume analysis and price action to confirm the intraday trend and gener- 2 www.activetradermag.com • May 2006 • ACTIVE TRADER TABLE 1 FIVE-YEAR TICK STATS The TICK has had a bullish bias over the past five years. Its aver- age daily high is nearly double its daily low, its average close every 15 minutes was +201, and it exceeded +300 nearly six times as often as it dropped below -300 (based on 15-minute intervals). ate trade signals. must take this upside bias into account. The focus was on the first 15 minutes The strategy’s bullish and bearish of the daily trade session because over thresholds are based on the TICK’s aver- TICK value the past five years the NYSE’s second- age close of +201 after 15 minutes. There Five-year high: +1,541 largest volume has occurred during this are thresholds for both high and low Five-year low: -1,495 period. Above-average TICK readings readings as well as for where the TICK generate buy signals at 9:45 a.m. ET. By closes. The high and low thresholds are Avg. daily high: +1,007 contrast, sell signals require below-aver- +750 and -350, which are approximately Avg. daily low: -673 age TICK readings along with down- +/-550 from the average close of +201; ward price moves (gaps or weakness) the closing TICK thresholds are +500 Avg. closing value within the first 15 minutes. and -100, which are approximately after 15 minutes: +201 The logic of this approach is that high- +/- 300 from the average close of +201. No. of 15-minute volume periods combined with price This means the TICK is bullish if it closes above +300: 12,855 moves and TICK readings in the same either reaches +750 within the first 15 direction help determine the trend for minutes of trading or closes above +500 No. of 15-minute the rest of the day. at 9:45 a.m. Similarly, the TICK is bearish closes below -300: 2,262 if it drops below -350 within the first 15 Trend clues at market’s open Figure 1 shows the NYSE’s average vol- ume of more than 3,700 stocks in 15- minute intervals from 9:30 a.m. to 4 p.m. TICK basics ET over the past five years. While vol- ume is highest in the last 15 minutes of he TICK is a very short-term (intraday) indicator that measures the trading, the second-highest volume bullish (upticking) or bearish (downticking) activity in NYSE stocks occurred in the first 15 minutes of the throughout the day. TIKI is the symbol for the same indicator calcu- regular session — from 9:30 a.m. to 9:45 lated on Dow Jones Industrial Average stocks; some data services also a.m. supply the TICK calculated on Nasdaq stocks. The day’s open and close stand out TThe TICK is a breadth indicator that gives traders an intraday look at the “inter- because institutional traders must exe- nal” strength or weakness of the market — that is, the strength or weakness cute large amounts of market-on-open beyond whether the overall market is up on a point or percentage basis. By com- and market-on-close orders; the price paring the number of stocks advancing to stocks declining, the indicator reflects moves that occur during these periods the market’s up or down momentum at a given moment. can leave clues about the market’s likely For example, if the S&P 500 index is up marginally but downticking stocks are direction. Although you can trade stocks consistently outnumbering upticking stocks (and the number of downticking and stock-index futures in the after- stocks is increasing, reflected by a downtrending TICK indicator), it is likely that hours electronic market, those markets only a relative handful of strong stocks are propping up the overall market. offer very little volume to offset posi- When buying completes in these stocks, a down move may result. tions against overnight breaking news Two contrarian uses of the TICK indicator are to look for divergence between while the U.S. stock market is closed for price and the indicator, and to use high or low TICK readings to identify momen- 17.5 hours. tum extremes (similar to how many traders use oscillators like the relative strength index or stochastics to locate overbought and oversold points). Defining TICK thresholds A divergence occurs when price makes a new high (or low) but the TICK Table 1 shows statistics behind the TICK makes a lower high (or higher low), failing to confirm the price move and warn- indicator’s historical behavior over the ing of a slackening of momentum and potential stall or reversal. A similar phe- past five years. Overall, the TICK had a nomenon would be a steady trend in the TICK that runs counter to the trend of bullish bias. The average daily TICK the market. Extreme high or low TICK readings sometimes accompany market high was nearly twice as large as the climaxes. daily low (+1,007 vs. -673). Also, the Because the TICK is a snapshot of the market at a given moment (and is thus TICK’s average close after 15 minutes very volatile), it can be deceptive. Because of this, the TICK is commonly was not only above zero (+201) but smoothed with a 10-period moving average to remove some of the “noise” and exceeded +300 almost six times as often better reveal the indicator’s direction and patterns. as it fell below -300. Buy and sell signals ACTIVE TRADER • May 2006 • www.activetradermag.com 3 Strategy code Tradestation EasyLanguage Code yesterday’s 15-minute bars), the TICK’s close < -100, and TICK’s {Data1 is @ES.D or any of the following: @ER2.D, @YM.D, @NQ.D, @EMD.D high < +750, sell short for the next Data2 is $TICK. Both Data1 and Data2 are 15 minute charts – a custom ses- 15 minutes (until 10 a.m.) at sion should be built for @YM.D to trade between 8:30 am CST and 3:15 pm CST today’s open (limit).
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