Sunday, December 21, 2008

A Different Look at Money Flow

As readers are aware, money flow is typically calculated by calculating the dollar volume of each transaction in a stock and then adding that amount to a cumulative total if the transaction occurs on an uptick; subtracting the amount if the transaction occurs on a downtick. Money flow for an entire index would simply consist of the sum of flow numbers for the component stocks.

I decided to experiment with a different means of calculating money flow for the overall stock market. I generated the dollar volume for each minute's transactions in the ES futures (closing price times volume for that one-minute period) and multiplied that figure by the average NYSE TICK reading for that minute. I then added this figure to a cumulative total, such that the cumulative total increased when average NYSE TICK was positive and decreased when the average one-minute TICK reading was negative.

This creates a cumulative TICK measure that is weighted by dollar volume. The rationale is that the "TICK flow" will increase or decrease greatly when markets are strong/weak on high volume. By weighting NYSE TICK for market participation, we get a sense for whether large buyers or sellers are active in the market.

The chart above shows the ES futures (blue line) plotted against the cumulative TICK flow line (pink) for the past week. Note that, as the S&P 500 Index weakened late in the week, the flow line remained near its peak, suggesting persistent buying interest. This interest showed up particularly among small cap issues.

In coming weeks, I will be investigating the TICK flow measure with historical data to see if it adds value to the cumulative adjusted TICK line that I normally post each Monday AM as part of my sector review. These tweaks of indicators sometimes lead to new observations and insights that prove worthwhile; it was just such a tweaking of a momentum measure that led to my development of the Demand/Supply Index posted each morning before trading via Twitter and summarized in cumulative form in my Monday AM posts.