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The TICK is your Ticket

Today's market promised good things at the open as it does most of the time when the futures are up slightly and the open is positive.  We looked for signs of vigorous buying among Dow stocks during the first few minutes of trading but there wasn't any.  After just six minutes into the session more Dow stocks were trading at their bid prices than the offers and the Dow TICK was weak with a negative reading. 

Why is this important The Dow stocks are among the most actively traded and most liquid in the NYSE.  They are commonly included in baskets of large capitalization stocks that form the basis of institutional program trading.  Believe it or not program trading now comprises over 50% of the total NYSE volume.  When baskets of stocks are sold Dow stocks fall in unison creating a negative Dow TICK reading.  When baskets are purchased we see positive Dow TICK readings.  The key is to see these stocks' uptick or downtick at the same time.  That is how you know these TICK readings are almost certainly related to program trading. 

When baskets of stocks are being purchased we should see positive readings in the early minutes of trading.  If the early TICK readings are flat to negative then we can assume that any early buying must be the novice traders and not the professionals.  We can not just look at the futures or the indices' point gains to try and gauge how the market is acting because things may not be what they seem to be on the surface.  

One of the most important indicators for the active trader is the ability for stocks to trade at the ask.  When the large cap stocks trade persistently at the bid early on in the day that is a sign that traders are more aggressive on the sell side than the buy side.  This piece of information can help you to anticipate head fake opens and be ready for a market reversal such as we had today. 

Remember this will help you identify the market reversal early in the opening hour.  Today's reading was correct and it is part of the reason I loaded up on short positions for my day trades and posted them to the message board.  This early reading can always reverse at anytime during the day. It did just that in the last hour as buying commenced late in the day. 

Day trade positions are always closed out before the close so gauging the market strength or weakness at the close is not necessary for day trades.  However it is always something to look at when having open swing trade positions you are holding over night.  Conversely it is not necessary to measure the TICK reading near the open if you are swing trading.  The difference being the open is more important for day trading and the close is more important for swing trading.  Keep this in mind when deciding between a day trade and a swing trade.

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