How to Get a Great Entry on a SPY Day Trade using Technical Analysis and $TICK

I don't always get the best entry on my SPY day trades, but I usually do get pretty close to the bottom or the top. How do I do that? I use $TICK.

What is $TICK?

$TICK is a very basic statistic that helps you gauge the degree of manipulation in the stock market. $TICK tells you the number of stocks on the NYSE (New York Stock Exchange) that are going up minus the number of stocks on the NYSE going down. There are ~2000 stocks listed on the NYSE. Honestly I don't know the exact number, I am going to assume it is 2000. $TICK typically reads between around -1000 to +1000. If $TICK is reading +1000 that means 1000 more stocks are going up than are going down. In other words if there are 2000 stocks total on the NYSE then 1500 are going up and 500 are going down, ie 1500-500=+1000. If 1500 stocks are going up and only 500 stocks are going down then what do you expect the stock market to do? Go up, right?

Wrong. When you think about it if $TICK is reading +1000 that means that people are buying 1500 out of the possible 2000 stocks listed on the stock exchange. Are ALL of these stocks really doing that well that they are all being bought? It's possible but highly unlikely. In general when the stock market is moving up $TICK reads between +200 and +600. When the stock market is going down $TICK reads between -200 and -400. These are considered normal values. If $TICK is reading between +600 and +1000 then the stock market may be going up at the moment but you should be wary of a reversal in the uptrend. If $TICK is reading between -400 and -1000 then the stock market may be going down at the moment but you should be wary of a reversal in the downtrend.

Why is there an asymmetry between the normal up and normal down $TICK values?

The stock market was designed to go up. Not down. So in general it's harder to make 1500 stocks go down than it is to make 1500 stocks go up. This means that a $TICK reading of +1000 is extremely bullish, but the equivalent bearish level is about -600. Furthermore a $TICK reading of -1000 is really bearish ugly and usually only observed during true sell offs or extreme levels of manipulation like options expiration.

How to use $TICK to make Contrarian Trades

So the stock market is going up and you do your technical analysis and find that SPY is at resistance and you expect SPY to drop. So you watch $TICK as SPY bangs up against the resistance trendline. Remember everyone in the world knows about the location of all the trendlines. If you know about a trendline, then everyone knows about it so expect manipulation. You can use $TICK to see the manipulation. If SPY is banging up against the resistance trendline and then breaks out above the trendline and you see $TICK jump to +1000 that's your que to short and is generally the best entry you can make.

On the other hand, if the stock market is going down and SPY is bouncing off a support trendline then you can again use $TICK as your que to go long. Now I will warn you that in an overall uptrend it can be many days before you see a -600 reading on $TICK whereas +600 is a very typical $TICK reading on most days. My point is to emphasize again the asymmetry between using $TICK to go long and using $TICK to go short and that you need to practice using $TICK for a long time so that you can become familiar with normal $TICK readings versus extreme $TICK readings and how they relate to the corresponding price action.

The Official Spycharter $TICK Setup

The following figure shows my typical trading setup:

On the left I have a chart for SPY, on the right I have a chart for $TICK. I typically day trade SPY on a 1 minute or 5 minute chart. I always have $TICK set to the 5 minute chart. I slap a 20 point moving average on top of $TICK so that I have some idea which direction $TICK is trending towards. I don't set $TICK to a 1 minute chart or lower because TICK can fluctuate very rapidly every minute, even every second. I have seen $TICK switch from +1000 to -200 in a few seconds, this can result in you making some really knee-jerk type impulsive trades. So in my personal experience I have found the right setting to be at the 5 minute level.

$TICK is like a siren

I always always keep an eye on $TICK. If I have to look at another stock then I switch my SPY chart over to the other stock that I want to see. But I leave my $TICK chart open. Because even if you're busy looking at another stock when you see $TICK spike to +1000 or -1000 then that serves as an alert to pay attention to SPY because something important in the stock market is happening.

Can $TICK be used to exit a trade?

Say that you are already in a profitable long day trade, should you wait for $TICK to read +1000 and use it as a que to exit the trade? ABSOLUTELY NOT! There is no requirement that $TICK has to read +1000 before a trend reversal, it is just a common occurrence. So if you wait around for $TICK to read +1000 before exiting a position it might never happen and SPY will already have reversed to the downside and you'll be left holding the bag. NEVER use $TICK to exit a position, only use $TICK to enter a position.

Can you set $TICK to a daily time scale and use it to generate a long-term buy/sell signal?

No. $TICK is strictly a day-trading tool. Stochastic oscillators and MACDs are more useful in generating longer term buy/sell signals.

When Should I Use $TICK?

$TICK is most useful beween the hours of 9:30EST to 11:30EST. This is usually the highest volume period of the day and subject to the most manipulation. The following chart shows SPY and $TICK action for Friday April 23, 2010:

I will go over most of the buy and sell signals shown on the chart and my thoughts assuming I received each signal with no position in SPY. I want to emphasize that you can't use $TICK by itself. If that were true then someone would just program a computer to buy at -1000 and short at +1000. You have to do the underlying technical analysis first and use it in conjunction with $TICK readings. Technical Analysis, resistance and support levels take precedence over $TICK. Don't blindly buy and sell based on $TICK.

Notice that the chart is plotted on West Coast time.

The -855 signal at open was a good buy signal. Given that I stated in my Friday SPY analysis that I would buy SPY on a dip below 120.87, and given that SPY did dip below 120.87 I would then wait for a low $TICK reading and if I saw $TICK read -855 I would definitely buy and have no regrets about my entry. This would have paid off handsomely and I'd look like a genius.

The +800 sell signal around 7:15 on the chart is considered a decent sell signal. I would feel much better shorting on a +1000 $TICK signal. However since I know that 121.5 is resistance on SPY, I again wouldn't feel bad shorting because SPY is at resistance at 121.5 AND $TICK is giving me a pretty high reading. So I would be ok shorting at this level. Again this would pay off handsomely and I'd look like a wizard. I would set 120.87 as a downside target because I know it is resistance and probably sell around 121.95 because it is a good practice to take profits early (more on this in another article).

Now look at the series of buy and sell signals after 7:30 on the chart. Would you short at SPY 121.2? It turns out that it would be a profitable trade. But in realtime despite the fact that $TICK is giving me a sell signal, I would not short here. Because I am not near any resistance level and so I consider this as chasing a trade which should always be avoided. I should have shorted at 121.5 and for whatever reason I missed my entry. Tough luck. Do not trade if there is no underlying technical analysis to back up your trade decision.

Likewise would you buy at the 8:30 mark based on a $TICK reading of -500? Most likely, but again the decision to buy would not be made based on $TICK alone. At 8:30, SPY was below 120.87 and it was our plan for Friday to buy SPY on a dip below 120.87. Also it is common for the low of the day to come in around 8:30 (more on this issue in another article). Finally by 8:30 SPY had touched ~120.65 twice in the past few hours which makes for a powerful W shaped reversal if it can hold 120.65. It is these factors used in conjunction with $TICK that would make for a great entry.

Notice how $TICK was able to confirm the lows and highs during the period before 8:30 and how the highs and lows setup very profitable trades (SPY really moved after the $TICK signals). Also notice how after 8:30 $TICK still delivered good buy and sell signals but they didn't result in very profitable trades (SPY did not swing much). This is because the volume drops off after 8:30 (11:30EST lunchtime on the East Coast) and trading is mostly comprised of more serious longer term investors.

One final remark on the chart is to again notice the asymmetry between $TICK buy and sell signals. Notice how it's harder to gauge a good buy signal (-600 $TICK reading) than it is to gauge a good sell signal (+1000 $TICK reading) due to the asymmetry in $TICK. For Friday -500 was a good buy signal, but this is easy to say looking back on the day. I wouldn't necessarily buy based on a -500 $TICK signal in real time unless I had supporting evidence from technical analysis.

Selling Pressure

Sometimes you may hear me say something like there is no selling pressure. What does that mean? There are certain days where SPY will drop but $TICK will not register very low readings. For example on some days SPY will drop and $TICK will barely register a -200 reading in a timespan of say an hour. I call this a lack of selling pressure and it indicates to me that it's not worth shorting.

The same statement can also be made about buying pressure, however remember that the stock market was designed to go up, not down, so it has happens all the time where $TICK reads between +200 to +300 all day and SPY steadily climbs all day. However I have never in my entire experience of trading with $TICK seen a day where SPY steadily dropped all day and $TICK read no lower than -200. Sell offs are dramatic and $TICK readings of -400 or lower are expected on sell offs. If $TICK isn't reading that low then chances of a sell off are very slim. I generally avoid trading on days with low $TICK readings (close to 0) because the price swings in SPY tend to be small.

$TICK Summary

*$TICK is a measure of manipulation

*Use Technical Analysis to identify support and resistance levels

*When SPY rises and hits a resistance level then wait for a $TICK reading of +1000 to short.

*When SPY drops and hits a support level then wait for a $TICK reading of -600 or less to go long.

*Do not trade blindly based on $TICK signals alone

*Trading based on $TICK signals lose effectiveness after 11:30EST unless it is options expiration, or another important news day like when the Fed decides to raise/lower interest rates

*Low absolute values of $TICK (close to 0) for prolonged periods of time serve as indicators to avoid day trading SPY because the trades will most likely not be very profitable.