Success in trading often comes down to identifying what is unlikely to happen. One of the ways that I determine this is to first determine what traders are actually doing in the market and I accomplish this by monitoring the NYSE issues trading on upticks versus downticks, known as $TICK by most quote vendors. Let's examine some of the ways we can use the TICK reading to identify what traders are doing in the market and therefore what may be unlikely to happen.

Before we start here are just a few TICK details: The TICK usually ranges from +1000 to -1000. If the TICK reads +500 then there are 500 NYSE issues trading on at an uptick. Extremes in the TICK can be seen on readings near above the +/- 1000 level and extreme TICK readings can often indicate the presence of an institutional buy/sell program or heavy short covering on large positive readings.

Remember those mood rings that were seen once upon a time, yeah, I really don't either but let's consider the concept. They were supposed to reflect the mood of the wearer and we can use the TICK to better reflect the mood of the market.

When looking at the market on an intraday basis we often assign classifications such as bearish or bullish, rangebound or trending. We can arrive at these conclusions by our market heuristics but since markets seem to change and cycle we should use something more quantitative, here is where the TICK can make a real difference.

Notice in the chart above how the TICK goes through its own up and down cycles as traders buy at the ask or sell at the bid. What we have is a visual representation of what traders are doing and how aggressive they are in doing it.

Here is the question to ask; are traders being aggressive in the direction of the current trend or are their actions of buying at the ask or selling at the bid betraying that trend?

In the TICK chart notice that a new daily SPY low was not matched by a new low or even an aggressively negative TICK reading. A market that cannot match the apparent price action with trading action is a market that is seeing a weakening trend. That can often mean a quick and potential profitable reversal.

Divergence is a key use for TICK.

Here is another great example of divergence.

As you can see in the chart above the morning SPY trend was clearly to the downside but when we throw in volume and the TICK we see clear divergence between price and trading action. In this case volume declined as the morning progressed indicating less involvement in the market-this in itself is a divergence. On the TICK chart notice how we can draw a trend line that slopes upward while prices trade near the daily lows, also note that each consecutive TICK low is equal to or higher than a previous low. Sellers have a hard time sustaining downside momentum if the number of issues trading on a downtick cannot increase and the TICK cannot remain below the -200 line.

This was a day for smart traders to use the TICK to identify the possibility for an upside reversal and buy new lows instead of selling.

The Trend Day

The Trend Day can a be great trading day if you are able to identify it and if you know when to place your trades; the TICK can be a great tool for both.

Here is a chart of a pretty typical Trend Day down. A Trend Day down occurs when we get an opening range breakout to the downside and then proceed lower for the majority of the day to close near the lows. You can obviously make a good deal of money on a Trend Day down if you can identify it and then know when and where to short.

Here is how to identify a Trend Day down using the chart and the TICK. We had both a gap-down open and then a downside breakout of the opening range-this instantly alerts to the potential for a Trend Day down but what really helps us is the TICK. I have drawn a red dashed line near +600 on the TICK chart, rallies in the TICK on a Trend Day down nearly always fail at the +400 to +600 range, spot this and you have gone a long way towards correctly identifying and then profiting from a Trend Day down. The way I trade a Trend Day down is to short rallies in the TICK to the +400 to +600 range, this allows you sell short at prices that should lead to very profitable trades.

A Trend Day Up works the same way, reverse the logic used above and buy on dips in the TICK. Notice how the TICK has a difficult time going below the zero line, this indicates that buyers are fairly aggressive and are lifting the ask with volume. Also note that volume increases on the rallies; when combined with the TICK this is another sign of aggressive buyers.

As you can see the TICK can be a very valuable trading tool. It allows you to see what traders are doing and how aggressive they are in doing it. I would encourage anyone wanting to trade with the TICK to watch it intraday for a couple of days or across different market environments like bullish or bearish trends to firmly place the concepts I discussed above into your mind.