Reading Market Volume Flow

I recently wrote about learning order flow, which is the changing of bids and offers in the order book for a market. A bit different is watching what we might call volume flow: the flow of volume as it is transacted at certain prices and times. As readers know, I use Market Delta to track volume flow. To track order flow, one needs a depth of market display.

Above, I took a Market Delta chart that shows volume transacted at the market bid x volume transacted at the offer within the bar. If you click on the chart, you'll see key points numbered:

1) Note the increased volume on the break to new highs, as large traders participate in the move;

2) Note how the increased buying also brings in sellers, creating high volume at the bid *and* at the offer--a two-sided market. This often begins a process of short-term equilibrium and the start of a resistance area;

3) Note how volume dries up as we move down to prior resistance (resistance becomes support);

4) Note how, once again, higher prices find an influx of buyers, as large traders continue to participate in the rise;

5) Note how volume *keeps* expanding as we move higher: the higher prices are attracting buyers, not sellers. That helps keep the rally going.

I find the volume flow information within the bars to be particularly useful as a close-to-the-market gauge of trader sentiment.

Comments

[LKofEnglish:]

If it looks like a duck and quacks like a duck...

Sep 16 12:49 PM

[Mad Hedge F...:]

aaf Ouch! So much for my “short ten consecutive up days” model. I shorted the S&P 500 September 1050 calls, which expire in two days. The trade was looking good all the way until this morning, when I got stopped out with a 0.5% loss. It’s no excuse that this works 98% of the time. This is well and truly a liquidity driven market. Stand out of the way. The S & P earnings multiple has now made a round trip from 18 times in 2007, to 10 times in March, and back up to 18 times today. Don’t fight the tape. Stand out of the way, and let the insanity play itself out before rebalancing your portfolio. At least I have my gold, silver, copper, crude, junk bond, emerging markets, FCX, BYD, water ETF, and short dollar profits to drown my sorrows in.

Sep 16 03:43 PM

[ebworthen:]

Good perspective and chart, thank you.

For every seller there is a buyer and vice-versa.

I fear that what we are seeing is the individual investor and fund managers buying into the top; afraid to "miss out" or underperform.

Meanwhile, the few that are on the true inside of the market gradually sell off daily in a perverse version of dolar cost averaging on the sell side.

If generations of investors are raped yet again with a correction the moral hazard we have already engendered will magnify geometrically.

Sep 16 04:19 PM

[hermanbrut:]

People lately have been saying the market has reached a bottom because the "second derivative is positive" of various prices.

A better math model for predictions, implied by Brett's article, may be to look at changes in the function y= (price)X(volume).
Just a thought.

Sep 17 09:23 AM