Trading can be as simple or complicated as we wish to make it. With all of the information available to traders today, it is very easy to complicate our trading. I would like to show you a relatively simple way to look at the E-mini S&P (ES) and determine if the market is currently trending or in a trading range.
When a trader approaches a market, one of the first things they should do is identify if the market is trending or trading in a sideways market. If you know which of these two modes the market is currently in, you will immediately know whether you want to be a buyer or seller in this market.
A tool that we can use to help determine the market condition is the $TICK indicator. The $TICK is an internal market breadth indicator that shows the number of stocks on the New York Stock Exchange (NYSE) that are either on an uptick or a downtick. There are approximately 3,300 stocks that trade on the NYSE. At any given time, each of these stocks are trading on an uptick, downtick or unchanged price. To get the value of the $TICK, we will need the sum of these 3,300 stocks TICK values. This value is figured by subtracting the number of stocks on downticks from the number of stocks on upticks. This value is updated approximately every 5 – 10 seconds on our chart packages.
There are many variables that would cause this number to be volatile. Imagine a buy or sell program that is trading 500 stocks at once. Once the program is executed, you would see the $TICK immediately show a 500 tick increase or decrease depending on if it was a buy or a sell program.
I would like to show you a way of smoothing this number out and charting the results so you can use the information for your trading.
The first thing we need is to create a 5 minute chart of the Regular Trading Hours (RTH) of the ES contract. The reason we need an RTH chart is because the stocks that make up the S&P Index do not trade at night. So that we can compare both markets together, we need to look at the RTH Futures. Then we can insert the $TICK chart above the ES chart as shown in Figure 1.
Looking at the $TICK chart, we can see a black horizontal line across the chart. This is the zero line for the $TICK indicator. When the candles are trading above the zero line, this is telling us that there are more NYSE stocks on upticks than downticks. If the candles are trading below the zero line, we know that there are more NYSE stocks on downticks than upticks. Since there is so much volatility each trading day, we need a way of smoothing out this $TICK indicator. To do this, we create a simple moving average (SMA) of 20 periods. If we just look at the candles crossing the zero line all day, there is not much sense of direction. But if we look at our 20 sma (blue line), we see that the SMA has been staying above the zero line most of the day. This is an indication of a strong uptrend and we should be looking to buy this market when the ES prices retrace back to good demand levels. This would be reversed if we saw the 20 sma staying below the zero line; we would look to sell rallies into good supply levels.
Figure 2 will show us a day when the ES was in a trading range and we could tell because the 20 sma was trading on both sides of the zero line. Another clue to look for is how far away from the zero line does the 20 sma get? If the 20 sma is very close to the zero line all day, there is currently not much trend in the market.
When the ES is showing a non-trending day, you can look to buy at demand levels and sell at supply levels. This type of market is known as channeling and allows traders to define extreme boundaries and trade from both the buy side and the sell side.
If you are a breakout style of trader, I would recommend that you look for days when the $TICK is showing signs of trend before you place a trade. If the market is channeling, then breakout trades will have a higher failure rate.
I would use the $TICK to trade the ES or the Dow Futures since the majority of their stocks trade on the NYSE. If you want to track the E-mini Nasdaq (NQ) market, then you can use the symbol $TICKQ.
The nice thing about using the $TICK indicator is it is as close to real time as you can get without much lag.
There are many other ways you can use $TICK to trade the markets, but I will leave that for some future articles. In the meantime, you should be able to determine if the ES is trending or not. Once you know this all you need to do is pick some supply/demand levels and buy or sell with the trend. If there is no trend, then set up some channel supply/demand levels and trade inside the channel. Buying the dips and selling the rallies is your best course for this type of day.
This week I have the honor of instructing a Futures class in Singapore and then doing a presentation at the Singapore Mercantile Exchange (SMX). With Australia being so close to provide natural resources and China and India nearby to provide so much demand, this region should do very well with the Commodity Futures markets. While I was doing a little sightseeing in Singapore, I could not help to notice how many tankers and other shipping vessels were anchored off the shore. This reminded me of how one could profit from the Commodity boom by doing some research on companies that transport Commodities around the world.
“Action is the foundational key to all success.” Pablo Picasso
It’s a trader’s paradise at the moment,
– Don Dawson