The second measure is the Delta measure that takes each transaction in a particular instrument, such as the ES futures, and identifies whether those transactions are occurring at the market's bid price at the time or at the offer price. Again, we're gauging the sentiment of market participants and how that shifts over time.
The pattern that has been quite helpful in the recent, higher volatility market is one in which there is persistent buying or selling (upticks or downticks dominate; volume at offer or at bid dominates), but that activity no longer moves the market significantly higher or lower. So why is this important?
In the current market, volatility is so high that even professional money managers at hedge funds have to size down and reduce their holding periods. Quite simply, in a market with daily ranges around 8%, these managers do not have a mandate to lose that much at all, not to mention in a single day. High volume and high volatility makes daytraders of many of us. When the ranges are so wide, no one can take the heat of adverse moves over a multiday period.
So what that means is that when buyers cannot move the market higher or sellers cannot push price to new sustained lows, those buyers and sellers are going to have to cover their positions--and they'll have to do it quickly, given the violence of moves we've been seeing. It's that "trapped volume" that creates the sellers and buyers for the reversal moves. The greater the trapped volume, the greater the subsequent move in the other direction.
What we see above is a chart of late yesterday's trade in the Russell 2000 ETF, IWM (bottom panel; one minute bars). (Chart created in Sierra Charts). Above the Russell is a TICK measure specific to the Russell 2000 stocks. I've drawn a 10-period moving average through the TICK bars (green line) and a red horizontal line at the zero level, so that you can readily see when we have net buying (green line above the zero line) and net selling pressure (green line below the zero line). Notice how we have net buying late in the day, but are not able to make and sustain fresh price highs in IWM. That alerts me to the potential that we could have some trapped longs in the overnight and next day's trade.
This, of course, is just a hypothesis, albeit one supported with data. If we see price action going forward in which buying cannot take out the prior day's high, that would support the hypothesis and could help us frame a winning trade.
Two points are important here: 1) the psychology/sentiment of the marketplace matters and sets up valuable trade ideas; 2) some of the best trade ideas come from following data that few others track. It is very difficult to achieve distinctive results by looking at the same things as everyone else.
Further Reading: