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Trading with Tick Index: S&P500 Tick1K Index Mismatch Leading Signals

By Lawrence  

To utilize S&P500 Tick1K Index, we can start from its basic properties of being highly correlated to the bar to bar pattern with Emini S&P (and SPY too) on 5-minute chart and also its cleaner trend advantage. From these two properties, I have discovered a set of leading signals that pinpoint the short term reversals, often before they happen. Let’s look at the patterns themselves and how to utilize them in real-time trading.

 

The Basic Mismatch Condition

When Emini S&P printed higher high while Tick1K Index also made a higher high on 5-min bar, there is a 85% chance the open to close relationship of the Emini S&P 5-min bar to match that with the S&P500 Tick1K Index. When they don’t and that Emini S&P printed an up close from its open, we have a Bearish Mismatch in place.

By the same token, when Emini S&P printed a lower low while Tick1K Index also made a lower low on their 5-min bars, and that EminiS&P printed a down close from its open yet Tick1K Index made an up close,we have a Bullish Mismatch in place.

Following chart shows the Tick1K Index with the regular NYSE Tick Index on the same chart as a comparison.

image

The red dots highlight the Bearish Mismatch signals and the green dots highlight the Bullish Mismatch signals.

As a comparison, NYSE Tick Index does not have the same bar to bar correlation quality like the Tick1K Index. Hence it cannot produce such mismatch signal consistently. In short, NYSE Tick Index is too noisy to generate precision signals of this kind.

 

Quick Assessment of Trend Quality

On the same chart, notice Tick1K Index trends with Emini S&P nicely.  It is a very strong confirmation indicator because it is not derived from the price of Emini S&P. Instead, Tick1K Index is the summary of the waves of buying and selling in the underlying components. Hence, once a move has started you can have confidence in the move to continue until Tick1K breaks its bar to bar trend.

The simplest criteria for identifying the end of a very short term trend, which is a move with duration from 20 up to 45 minutes, is the Tick1K Index breaking its 2-bar extremes.

For example, if Emini S&P has been trending down, when Tick1K Index breaks its 2-bar highest high, even when Emini S&P has not, we know the move will at least take a pause within 1 bar. Given other conditions are met, like having a mismatch already in place or a divergence setup formed, this trend breaking condition is the confirmation of these trading setups.

As a comparison, notice that the regular TIck Index is so noisy that even though Emini S&P is in a clear down trend in the chart, it still prints +400 and even +800 multiple times during the day. This makes it very difficult to identify the current trend of the market with NYSE Tick Index. Many people tried to reduce the noise with moving average on NYSE Tick Index but it is not going to help since the quality of the information in the first place is inferior, the derivatives of the information can never be better.

 

The Strength of a Reversal Based on Mismatch

When a mismatch happens, we have to assess the situation in several areas based on the context for which the signal is generated.

First, if the mismatch happens at a multiple timeframe support or resistance zone (using the Real-Time Price Level tool), the reversal should take you to at least the midpoint of the matching opposite end. For example, should a bullish mismatch happening at afterhours low with daily price level support at the same zone, we can focus on a run back up to at least afterhours midpoint as long as the swing low price of Emini S&P printed with the bullish mismatch is not breached by more than the average range of a 5-min bar at the time. This gives you the minimal price target to aim for.

Second, since mismatch is a condition based on the buying and selling in the components, the core meaning is that we have identified the underlying components are no longer being pushed as hard in the current trend. Thus, a strong directional move in Emini S&P can still extend itself further just like a car moving at high speed cannot stop immediately even if you press the brake very hard. In such cases, the Tick1K Index will continue to give up the original trend while Emini S&P extends just a bit further.

This is what happened on the example chart near 1 pm. This tells you whether the reversal is likely to be short-lived or important reversal for the day.

Third, the duration of the current trending move matters. A move that spends 30 minutes going in one direction but not as much as the last wave in the same direction earlier in the day is a tell that the fuel to go further can be spent already. Fuel to go in one direction is often provided by the trapped players across several timeframes who are forced to give up their positions, either willingly as being stopped out on stop loss orders, or unwillingly as being stopped out by margin call.

The bullish mismatch happened at 2pm on the example chart is one of those perfect setups for a strong reversal.

 

The Divergence Combo from a Mismatch Signal

Divergence setups generated from Tick1K Index for day trading are often negative divergence, the non-confirmation of the price movement by the indicator.

For Bullish Divergence, we are looking for, on swing basis, lower lows in Emini S&P while Tick1K Index giving us clear higher low or double bottom.

For Bearish Divergence, we are looking for, on swing basis, higher highs in Emini S&P while Tick1K Index giving us clear lower high or double top.

For both situations, the strength of the divergence is often a function of the time window for which the divergence is formed. As a general rule of thumb, a divergence setup formed within a 20 to 30 minute time window is not as powerful as one formed in an hour time span.

Remember though, the context for which the divergence matters just like the mismatch signals.

 

Historical Perspective

The NYSE Tick Index used to work very well back in the early 1990s but it is no longer functional in this modern bot driven market environment. Many of its great properties for day trading have now disappeared. Even though many people still try to make sense from the data, it is just a matter of time it will become completely useless.

As the modernized version of NYSE Tick Index, S&P500 Tick1K Index inherited all the useful statistical properties of NYSE Tick Index and also having its own special characteristics due to better design in data collection. Tick1K Index has been working very well over the past 10 years since I first collected the data. It is working even better now as more and more bots are being utilized in trading, making the herd behaviour even more obvious than ever.

 

Notes

S&P500 Tick1K Index is available from the Real-Time Emini S&P Custom Breadth chart, part of our premium member services.

 

Resources

The Advantages of S&P500 Tick1K Index Over NYSE Tick Index

Introduction to Emini S&P Real-Time Custom Market Breadth

Access to Emini S&P Real-Time Custom Market Breadth available from S&P Signals page

 

part of Trading with Tick Index series

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Comments
  • Minty415  October 21, 2016 at 12:30:02

    If we can add these signals to the RT Trading Assistant with a unique sound alert that would be great. Thanks.

  • MidKnight  October 22, 2016 at 20:42:38

    Even better if we could get this data for some other markets? ;-)

    With kind regards,
    MK

  • Han777  October 23, 2016 at 10:55:17

    Exquisite explanation. Thanks! Any way to optionally enlarge the view. A large arrow would be more noticeable. Small adjustment in size could match the RT Trading Assistant size.

  • Han777  January 23, 2017 at 03:21:07

    When you wrote “This is what happened on the example chart near 1 pm. This tells you whether the reversal is likely to be short-lived or important reversal for the day.” would that mean that the S&P trend extension against the 1K Tick reversal indicates a short-lived reversal or vica versa?

    Suggestion: If the S&P and 1K Tick panes were the same height we could see their relative vertical movement more easily.

    • Lawrence  January 26, 2017 at 00:29:56

      The near 1 pm flush in Tick1K was answered by a strong reversal in Tick1K itself, that confirms the exhaustion and breaking of the down trend. But the downside momentum in ES gives us a high probability setup for at least one more push lower.

      In other words, we got the message that a brake pressed hard (strong Tick1K reversal) and ES is ready for reversal, just that the price momentum has to do what it usually do before it can turn around itself.

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