Tuesday, December 27, 2016

Tracking Multiday Patterns of Supply and Demand in the Stock Market

This is the second in a series of posts that takes a look at the indicators I commonly track in my trading.  The first post looked at upticks vs. downticks among all listed stocks on a minute to minute basis as a way of tracking evolving demand and supply in the overall market.  That is very helpful for detecting intraday patterns in which buying or selling accelerates or dries up, leading to breakout moves and reversals.

Above we see a simple extension of the indicator, in which we track a 10-minute moving average of the upticks and downticks measure.  The high, low, and close in net ticks for each minute is tracked over a moving ten-minute window.  With that smoothing, we can more readily look at demand and supply patterns over a swing time frame.  

Notice how, in the first half of the chart, the net buying was restrained and could not lift SPY to fresh price highs.  When this occurs and sellers eventually emerge, many of those buyers are forced to cover, contributed to a selloff.  

Conversely, on the right side of the chart, notice how SPY has been making successively higher lows at periods of net selling.  Sellers are no longer able to move the market lower and, toward the end of the week, had to cover, contributing to a pop higher in SPY.

Because of low volumes during this holiday period, both the buying and selling numbers have been relatively restrained.  A shift in the balance of buying vs. selling when volume finally comes into the market will provide an excellent tell for the next directional move in stocks.

Further Reading:  Finding the Strengths in Our Trading Weaknesses