Observing Market Personality
Profiting From The Tick Indicator
by James Kellndorfer
Last time, we introduced the tick indicator. This time, here's how to use the information gleaned from the tick indicator.
The tick indicator contains information about optimism or pessimism in the market on any given day. If there were a method to smooth these values and harness the longer-term intermediate cycles in the market, there might be even more valuable information hidden within the tick.
TICK-BASED OSCILLATOR
To smooth the series, I simply add the most recent four days' worth of intraday highs and intraday lows separately. After creating these sums, I plot the four-day sum of the intraday highs and intraday lows. Figure 1 illustrates the effect of smoothing these wild fluctuations. Now, the regular longer-term tradable cycles are clearer, but there are still periods that don't have a high degree of correlation. In addition, the chart overlays the four-day sums with the Standard & Poor's 500 futures daily close, and you can see the intraday highs and lows converging and diverging from each other. Note there were three occasions when the two extremes (intraday highs and lows) overlapped each other. These overlapping periods occurred at each of the major market lows.
FUZZY LOGIC
In an effort to limit periods that don't correlate well, I use another technique called fuzzy logic to increase the accuracy of the oscillator. Fuzzy logic enables us to combine several series to produce one oscillator. As demonstrated, the four-day sum was plotted to show how the intraday highs and lows could be used as an indicator.
Figure 1: Four-day sum of intraday highs and lows. Here you see areas where there is a low degree of correlation. To accommodate, the three-, four-, and five-day series were combined into one value plotted at the top of the chart as the tick oscillator.
...Continued in the December 2003 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.