Monday, December 01, 2008

Cumulative Money Flow for Dow Stocks

Recall that money flow takes the dollar value of each trade and multiplies that by the trade volume. This dollar volume is added to a daily cumulative total if the trade takes place on an uptick; it is subtracted from the daily total if it occurs on a downtick. When heavy volume is hitting bids, we see a very weak money flow; when heavy volume lifts offers, we see strong money flow numbers. By cumulating money flow for each of the Dow 30 industrial stocks, we can arrive at a sentiment gauge for the large cap market. This money flow figure is posted by the Online Wall St. Journal.

I've created a cumulative line of the daily money flow numbers for the Dow stocks. Note that it tracks price pretty well and certainly indicates that sentiment has been largely bearish since the start of October. You can see that we're testing the bear market lows in the Cumulative Money Flow line (pink line above). Note also how Monday's steep decline was preceded by up days in the Dow that showed negative money flow. I've generally found such divergences worth paying attention to. Note, for instance, the tepid Flow readings in early November when the Dow made a fresh peak, and the positive divergence in late October, when the Dow rebounded from its low.