Monday, December 17, 2007

Gauging Market Strength and Weakness: Buying and Selling Events as Independent Variables

Most of what we look at is the summing or averaging of buying and selling events. Price moves higher during a given time period, and it moves lower at other periods. Bar charts sum these price movements over a longer period to show us overall price movement and change. Similarly, we sum buying and selling events via such indicators as advance-decline lines, NYSE TICK, moving averages, and oscillators.

Suppose, however, we adopt a different framework and view buying and selling events as orthogonal. Instead of summing and averaging them, we treat them as independent variables. Thus, for instance, any given time period might display very strong buying *and* very strong selling; very weak buying *and* very weak selling; or any permutation thereof.

Once we conceptually separate strong/weak buying from strong/weak selling, we're then in a position to ask interesting empirical questions:

* Do weak/strong buying days have different implications for future price change than weak/strong selling days?

* Do particular combinations of buying/selling levels identify trending days?

* Can we profile average levels of buying/selling at various times of day to gauge the market's current strength/weakness?

* Do topping markets show early signs of reduced buying and bottoming markets show early signs of reduced selling?

I'm just in the early phases of this research, but results to date look promising. I hope to have concrete results to report by year's end, resulting in a useful and unique market indicator.


Trend and Trajectory

Sentiment Trends