Tracking Instantaneous Supply and Demand in the Stock Market

This is the first post in a series in which I illustrate indicators that I follow in trading the SPX stock index.  I have illustrated with the SPY ETF (blue line), but the same principles hold with the ES futures, which is what I trade.  The chart above represents 1-minute data points for Friday, December 23rd.

The red line represents moment to moment upticks versus downticks for all listed stocks, not just those included in the SPX or NYSE universe.  (Raw data from e-Signal).  When the red line moves above zero, we have more stocks trading on upticks than downticks.  When it is below zero, we have more stocks trading on downticks.  This makes the measure an unusually sensitive barometer of buying and selling interest across all stocks.

Several patterns set up during the day (all times EST):

1)  We had a burst of buying a little after the 10 AM hour, yet SPY was unable to make fresh session highs.  This divergence occurs when buyers are no longer able to propel stocks higher.  As sellers come in, those buyers have to stop out and that creates a short-term down move.

2)  Notice how we made session lows a little after the 11 AM hour on good selling pressure.  We tested those lows around 1 PM, but observe how we had less selling pressure.  As stocks tried to make new lows, selling dried up.  This often precedes a rally, as sellers are forced to stop out once buying steps in.

3)  Note how upticks outnumbered downticks significantly for most the afternoon session.  With selling drying up, buyers remained in control for most the session.  A cumulative line of the US TICK measure is a handy way to view the trend of buying vs selling.  The cumulative line was in a continuous uptrend from about 1 PM forward.

This is just one indicator that I track on a moment to moment basis during the trading day.  The idea is to quickly identify turns in buying versus selling sentiment.  I find little need to make reference to chart patterns or traditional technical measures when a direct index of buying and selling activity is readily available.

Over the course of many days, you see patterns appear and reappear.  It is sensitivity to those patterns--and the ability to relate patterns to one another in real time--that enables the trader to grasp the meaning and significance of market movement.

Further Reading:  Using Upticks and Downticks to Identify Trend Days in the Market
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