Measure, Quantify, Track Supply & Demand and Herding of Financial Market Participants

Let’s start with the primary indicators, MT Volatility and the Balance of Power (BoP):

MT Volatility IndexTM (MTVol)

This proprietary index measures the shift in the herd when buying to selling or selling to buying is taking place on a daily basis. It can also be use on an intra-day signal to determine the intensity of moves made by the market during the day session using the Premium MTVOL script for TOS.

MT Volatility is our barometer for the overall market. When it’s above 100% we are in bear market territory. When it’s below 90% we are in bull market territory. The area between 90% and 100% typically means a choppy, trend-less market.

• The average bullish range for MTVol is between 50% – 90% (buying activity).

• The average bearish range for MTVol is between 100% – 150% (selling activity)

MTVol measures the net balance of buy/sell orders in the market over a period of time.

An index reading under 100% means more people are buying than selling.

An index reading over 100% means more traders sold or sold short.

The trend and rate at which moves matters as much as the level. Here are some examples:

If MTVol is 70% and rises to 80% in a week, there was net selling by market participants for that period. If it rises by 10% over a day or a few days, it’s even more significant, and may indicate more selling to come.

If MTVol is 90% and declines to 80% in the period of a week, there was net buying by market participants. If it declines by 10% over a day or a few days, it’s even more significant and may indicate more buying to come.

KEY POINTS:

When MTVol is trending lower and is below 90% it indicates optimistic buying and generally any selling is light, pullbacks will not last long and the market will soon resume its advance if there’s no strong bearish herding in the BoP.

When MTVol is trending higher and is above 100% it indicates negative fear and selling and generally any buying is light, rallies will not last long and the market will resume its decline if there is no strong bullish herding in the BoP.

TIP: The trend of MT Volatility is as important as the level. Watch for increases or decreases in MTVol of 10 net percentage points or more in a single day. It’s a clue that there’s momentum behind the move and it will likely continue in the direction of the increase or decrease.

Balance of PowerTM (BoP)

Our Balance of PowerTM (BoP) signal tracks the movement of the herd and shows us who is in control (buyers or sellers) at any one time. It can also be use on an intra-day signal to determine the intensity of moves made by the market during the day session using the Premium BoP (with bull and bear trap signals) script for TOS.

Balance of Power (BoP) is a unique visual representation of the herd moving through the market

The ‘herd’ includes every market participant (retail, HFT, prop traders, investment advisors, institutional traders, hedge funds, family offices, trust and pension funds, etc.) that moves through market and whose transactions are recorded and published by the exchanges.

We see evidence in our BoP signal that the entire market is driven by this herding effect and we can actually observe the “shift” (see screenshot below) taking place from one side to the other as the herd moves through the marketplace:

As mentioned, the Balance of Power is a visual representation of the herd moving through the financial markets.

The “1’s” in the filled cells are simply representations of herding activity and do not carry any other significance. In other words, we could have used “X’s” or “0’s”, etc. or any other mark.

The BoP is 12 columns in width and divided evenly into a Bullish and Bearish herding sections. The six on the left are for visualizing bullish herding. The six on the right are for visualizing bearish herding.

An idealized structure, for either bullish or bearish herding, starts in the furthest left column in the respective sections and fills out into the rest of the columns from left to right as shown here:

As the cells are ‘filled out’ from left to right, the ‘perfect’ bullish or bearish herding increases until it reaches the farthest right column.

• TIP: Only the strongest herding will fill out all six columns from left to right in the stylized manner above or something similar.

This is the perfect structure but, of course, the market is anything but perfect. But when you’re trying to evaluate the potential extension of a rally or decline or trying to determine if the rally or decline is coming to an end look to the perfect model above as the key.

You will never see this form perfectly as shown above in real trading situations. Herding in the BoP can be stalled, be a non-starter or be ill-formed which all provide important information about the rally or decline in progress.

This may be the most challenging of the MT Signals to analyze but it’s also the most important to determine possible starting points and ending points and the strength or weakness of a rally or decline.

In almost every case, you will always want to see at least the first three columns filled out to confirm a new rally or decline – as a start. This formation generally leads to the best declines or advances with the biggest swing in prices.

This is a ‘perfect’ bearish herding example of how a decline should start if it’s going to be a large swing:

This is a ‘prefect’ bullish herding example of how a rally should start if it’s going to be a large swing:

And, of course, there are some exceptional rally’s or declines that didn’t start this way but this is the ideal way they should start.

Now, let’s move on to the secondary Market Timer indicators. While not as important as the two primary indicators, they shed light on anomalies that occur in the market.