In my post on the structure of market reversals, I presented a common sequence of price and volume events that occur at market transitions. This sequence--and the notion of transitional structures as patterns that present themselves at multiple time frames--was also elaborated in my recent Webinar.
In the chart above, we see a transitional structure from Friday's market. Notice the distinct elements: the momentum extreme featuring high volume and a high proportion of trade at the market bid; further selling and a price low on lower volume and more modest downside momentum; a significant bounce from the price lows and then an exhaustion of sellers, who can no longer push the market to new lows; and finally a reversal and influx of buyers.
What makes the Market Delta chart above unique, however, is that the volume data are derived solely from trades of 100 contracts and more. Indeed, the numbers in the bars are not volume at all, but rather the number of large trades that are being transacted. While not all large traders necessarily transact their business in such large increments, we can rest assured that small traders are not flinging hundred-lots around. By printing only trades from large traders and seeing whether those trades--and only those trades--are predominantly occurring at the bid price or at the offer, we can see in a rather transparent way whether large traders are aggressive to the buy or sell side.
Two pieces of data from the chart are important:
1) In the exhaustion phase, note how there was an influx of large trades hitting the market bid. When this selling could not push the market to new lows, those large traders had to cover their shorts, contributing to the subsequent runup. Finding spots where large traders are pushing the market one way and cannot succeed very often produces useful short-term countertrend trades;
2) After the runup, also notice how the number of large trades expanded, with many occurring on the bid. This influx of large sellers is common at short-term market tops and can aid order-flow oriented traders in taking profits (or at least in not jumping aboard the tail ends of moves).
Finally, to amplify a recent comment from the Weblog, since volume is so well-correlated with volatility, tracking the number of large trades in the market gives us some idea of the short-term opportunity for the day timeframe trader. We can readily see large traders enter and leave the markets and we can note the price levels at which they shift their participation.
If less than 10% of all trades control over 90% of all volume, why not focus on those and separate signal from noise? One of my current research projects is constructing market indicators derived solely from large trade data. I hope to report more in coming weeks.