Monday, December 07, 2009

A Look at the Cumulative Delta Indicator

As readers are aware, the Market Delta program tracks the volume transacted at the market's offer price vs. the volume transacted at the market's bid price to gauge short-term sentiment.

By calculating volume at offer minus volume at bid for each time period in the day and then cumulating those numbers, we have a Cumulative Delta indicator that is similar in theory to the cumulative NYSE TICK.

We can see that, for today's trade, the Cumulative Delta line tracked price quite closely. In trending markets, we will see progressively higher or lower values for Cumulative Delta. In non-trending markets, we see the Cumulative Delta line oscillate around a zero level (blue line above).

It is useful to calculate Cumulative Delta as a function of total volume traded; that ratio tends to move toward zero through the day on range days and stays solidly positive or negative on trending days.

Because Cumulative Delta as calculated above is specific to the ES contract, it provides a different look at intraday sentiment than the cumulative NYSE TICK, which tracks all listed NYSE stocks. When we see the Cumulative Delta line diverge meaningfully from the cumulative TICK line, it tells us that there is relative bullish or bearish sentiment in the S&P 500 Index relative to the broad list of stocks.

When Cumulative Delta and cumulative TICK are moving in the same direction, there is strong sentiment affecting stocks; that is worth following.