TICK overbought and oversold levels can vary depending on conditions. For the purposes of this article, a reading above +500 indicates an overbought condition and a reading below –500 indicates 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 overbought or oversold market as price is testing the support or resistance levels of a trading range.
---TICK AND RESISTANCE
---The TICK indicator moved into overbought territory as SPY tested its resistance zone. The combination of these signals set the stage for low-risk short trades. The second short sale was also supported by the divergence that occurred between the higher price high and lower TICK high.[You must be registered and logged in to see this image.]
Figure 1 (opposite page) is a oneminute 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 resistance 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 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.
---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.[You must be registered and logged in to see this image.]
In Figure 2 (above), price fell to a new low at approximately 1:05 p.m. but the corresponding TICK low was higher than its 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.
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 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.
Zero Line Crossings
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 situations, –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 trend.
---A move by the TICK below zero coincides with a 50-percent retracement of the earlier upmove. The TICK then moves back above zero, and a long trade is triggered when price breaks above the upper channel line.[You must be registered and logged in to see this image.]
At the beginning of Figure 3 , SPY was in an uptrend and the TICK reached an overbought level of +600, which indicates a strong, uptrending market. In such a situation, the goal is to buy on a pullback. Countert rend channel lines are drawn as price turns down a little after 10 a.m., forming the pullback. As the TICK dropped below zero twice between approximately 10:11 and 10:30 (and below –100 the second time), price tagged the 50 percent Fibonacci retracement line.
The combination of the TICK oversold signal and the 50 percent retracement made the odds good for an up move.This next development to look for is a move above the upper channel line, which would indicate the pullback has ended and price could continuein its previous direction. When the upper channel line is penetrated, go long with a stop below the low of the entry bar. Take profits at the previous high.However, patience is required when trading this setup. The TICK should be given time to bottom out in an uptrend
or top out in a downtrend; don’t expect a sudden price reversal when the TICK indicator simply hits the zero line. Other technical factors should be consulted before entering any trades, such as employing a price pattern, as presented here.
---In this pullback, price retraces to the 38 percent line. The previous high provides a price target for the trade.[You must be registered and logged in to see this image.]
Figure 4 (top, right) provides a similar example. It shows a very high TICK reading of +900, although price continued to move higher. At around 2:20 p.m., price retraced approximately 38 percent (another Fibonacci retracement level) and a countertrend channel formed. A buy signal occurred after the TICK crossed back above the zero level and price broke out above the upper channel line. After that, the stock resumed its uptrend, including a gapup open the next day. However, there are times when the market is trending and the TICK does reach the overbought (+500) or the oversold (-500) levels.
---GOING WITH THE TREND
---A retracement close to the 38-percent Fibonacci level and an overbought TICK reading around +500 set up a short trade in the direction of the longer-term trend.[You must be registered and logged in to see this image.]
In Figure 5 (bottom, right), SPY and the TICK both made new lows around 10:15 a.m. The TICK broke below –200, at which point a slight countertrend rally ensued in SPY. A combination of bearish indications signaled a short trade: The countertrend rally reversed after approaching the 38- percent retracement level, and the TICK crose to just below +500 (on a oneminute close basis; it exceeded +500 before the bar closed), indicating an overbought condition. Go short on a breakdown of the lower channel line, with a stop at the high of that bar. During an uptrend, look for the same setup, in reverse, if the TICK drops to –500.
As these examples suggest, the TICK indicator should be used to set up or confirm a trade, not as a stand-alone tool. By utilizing the TICK in conjunction with price patterns, technical indicators, and in the context of the overall trend and market environment, you can make better buy and sell decisions.[You must be registered and logged in to see this image.]