What interested us and the reason we named it the BoP ‘curve’ is because the formations remind us of a bell curve.
The BoP Curve is similar to what the Pipeline and Flow are to MTVol – it’s helps us see what is coming in the BoP – when it reaches extreme low or high levels (‘valleys’ and ‘peaks’) and when it potentially starts a new herding ‘cycle’
We noticed a cyclic motion in the Balance of Power (BoP) from bullish herding to bearish herding and back again. We started thinking about why that might be happening in the market and began working on an algorithm that would show us this phenomenon in a visual way each day. Also available in the Market Timer Premium scripts download for intra-day use.
The result of our work is the BoP Curve. The bearish herding on the Curve is highlighted in blue and the bullish herding is highlighted in the beige just like the BoP bullish/bearish columns.
The difference is that we can now ‘see’ when there are peaks and valleys in the curve and which way the BoP (bullish or bearish) is trending – up or down.
We quantify market supply and demand of the herd through our proprietary Market Timer
Supply and Demand Index
We quantify market supply and demand of the herd through our proprietary Market Timer Supply/Demand Index (MTSD) and the direction of the herd through the Balance of Power (BoP) section of Market Timer.
The MTSD Index gives us a specific positive (buying / liquidity) or negative (selling / removing liquidity) number EOD. 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 SD script for TOS.
The amount of selling or buying pressure on the market for any particular day is typically in a range small range – between +10 to -10, but in cases of extreme herding behavior it can go outside these ranges possibly indicating climax buying or selling signaling the end of a trend.
It can also alert us to unusual market activity.
We can tell if the herd is starting to buy or sell by watching the MTSD numbers.
Two useful MTSD signals are the ‘buying on the decline’ and ‘selling on the advance’ as illustrated below.
Example #1: Buying on the decline
When the DOW declines but the MTSD index is positive it indicates what we call ‘buying on the decline’.
In the chart above, the DOW declined -9.64 points but the MTSD was +9, the next day it declined -53.50 and MTSD was +4, the day after that the DOW declined -11.77 and MTSD was +5. This is ‘buying on the decline’ which means that there was net buying by the bullish herd on these days, not selling, even though the market declined.
The result was the market rallied by 483 points in the 5 days following the accumulation.
Example #2: Selling on the advance
When the DOW advances but the MTSD index is negative it indicates what we call ‘selling on the advance’.
In the second example, we see a large, negative MTSD Index at -328 and the next day at -4 on when the DOW moved higher by 72 points and 37 points.
The result was the market declined by 2,326 points in the 5 days following the distribution.
The MT Supply and Demand Index is a powerful indicator that informs us if there’s net real demand (accumulation) or net real supply (distribution) coming into the market.
The MTSD signal should be used in conjunction with the MT Volatility Index and the BoP to give us an accurate picture of the overall trend.
Example #3: MTSD Index Identifies Accumulation/Distribution
The MTSD Index can also tell us, with a high degree of confidence, if stocks are being accumulated or distributed long-term.
In this Guide we use the term “accumulation” to mean that the herd is buying and once the buying is strong enough stocks with rise. We use the term “distribution” to mean the herd is selling stocks and when the selling is strong enough stocks will decline.
From December 30th, 2015 to February 11th, 2016, the DOW was in a steep decline losing more than 2,000 points. For the casual market observer this was a difficult time to trade.
The market was volatile and selling appeared to be relentless. Then the market dropped 756 points in just 5 days. However, it was clear to us that the decline was at an end when we looked at the declines and very small negative MTSD numbers on 2/9, 2/10 and 2/11 it indicated the selling was drying up:
A MTSD Index number equal to or greater than 10 indicates heavy buying (accumulation) or less than or equal to -10, heavy selling (distribution).
Anything in between is considered and noted as “moderate” (4 to 9) or “light” (0, 1, 2 or 3) for either accumulation or distribution.
We can clearly see the selling starting to dry up on 2/11 with the DOW declining -254 points but MTSD was only -8 indicating “moderate” selling.
The following three days we see heavy accumulation (2/12, 2/16, 2/17) with MTSD readings of +14, +15 and +18.
In this example, the DOW climbed nearly 4,000 points over the next 12 months.
Although this one indicator alone can dramatically improve our trading, we have additional MT tools that are designed to confirm, support and verify our analysis of the MTSD Index.
In other words, MTSD should be used in context with our other indicators.
Together they give us a complete picture of the state of the market
MT Pipeline and Flow
The Pipeline and Flow are secondary indicators to help predict MTVol.
The MT Pipeline is our ‘early warning system’ to potential increases or decreases in MT Volatility. It uses an algorithm based on the movement of the MT Volatility Index to predict when MTVol might experience a change in value.
In the example below, the Pipeline indicated four days before that MT Volatility would drop below 100%:
Flow is the average of the 3 columns of the Pipeline so we can quickly see the probability that MT Volatility will rise or fall in the near future.
When the Flow is higher than 90% it senses that MT Volatility could rise in the near-term, the cell values will turn red.
When the Flow is below 90% it senses that MT Volatility could decline in the near term the cell values turn white.
The cells in the three columns of the Pipeline will fill red when they rise above 90% and turn white again when values drop below 90%.
Pipeline Trends, Levels and Anomalies
The Market Timer Pipeline helps to warn of us of future movements of MTVol. The trend is as important as the level it’s at and so even though it may be ‘flashing red’ it’s the trend as well as the level of the Pipeline that has predictive value. The Flow is the average of the three Pipeline columns, so it gives us a quick glance at the trend of the Pipeline.
When the Flow rises above 100% it gives us a heads up to the potential for the MTVol to also increase above 100%. When Flow declines below 90% we anticipate that MTVol will also decline below 90%. When that does not happen then we consider it to be an anomaly and something worthy of study.
Swing Signal Algorithm
The Market Timer Swing Signal Algorithm (MTSS) is an intermediate-trend (2-7 days or more) signal that generates a green arrow for an UP trend, a red arrow for a DOWN trend and a dot (•) for a transition between up and down signals or neutral signal.
The Swing Signal algorithm is a powerful prediction algorithm based on a quantitative analysis of Market Timer data
The Swing Signal is available on both the NASDAQ and the DOW/S&P500 spreadsheets.
Strength Trend Index (ST)
The Market Timer Strength Trend (ST) indicator is a short-term and intra-day signal that helps determine the intensity of market movements by the herd.
The ST number is generated by a quantitative analysis of Market Timer data that measures momentum, speed and recency of internal market data to determine the intensity of the move.
We look especially for ‘divergences’ from previous lows and high and the strength number to determine probabilities.
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 ST script for TOS.
This is the benchmark we use internally to determine if a move is ‘strong’ or ‘weak’:
If the price move and corresponding STRENGTH indicator number is the same as or less than the benchmark then it’s considered to be a ‘weak’ move.
If the price move and corresponding STRENGTH indicator number is the same as or more than the benchmark then it’s considered to be a ‘strong’ move.
In addition, as you’ll see in the examples below ‘divergences’ can give you an edge by setting up the next trading day.
Let’s look at some examples:
In the example above, we first note that there’s a dip in the Trend chart moving right to the left indicating that ‘dip’ is fading into past history… and so the trend since the dip has been ‘up to sideways’.
Next, we look to see if there’s movement of the Strength (higher and “stronger” or lower and “weaker”) from the previous day.
In this example, we see that the Strength has moved higher from -3 when the DOW declined 344 points to “-0” when it declined 9 points. That’s a move higher indicating the market is getting ‘stronger’.
This gives us a clue that there’s at least a probability of a rally the very next day because the market is getting ‘stronger’ according to the reading in the Strength column.
The result? The market advanced 254 points the next day.
Here’s another example of how we use the Strength indicator, and divergence, to predict the next day’s market move:
In this example, we had one day when the market moved lower by 166 points with a “Strength” of -0 showing mild weakness. That was followed by two days in a row in which the market moved higher and the Strength indicator moved higher from +0 to +3.
The very next day however, the Strength indicator declined from +3 to +1. Here’s where the divergence can help:
When the DOW is higher than the previous day but the Strength indicator is lower, that shows that the move wasn’t as strong as the previous day which indicates weakness – even though the gain in points was larger.
The very next day the market declined 299 points.
Using the same example, the next four days, the market declined. However, our Strength indicator went from -15 to -6 to -1 showing some Strength coming into the market as it moved closer to zero. The very next day the market declined 70 points but the Strength indicator rose to +1. Also note that the Trend chart started moving higher on the days in which the market declined -381, -420 and -70 points.
The next day the market advanced 336 points.
Here’s an example of using the Strength indicator with divergence:
The DOW had two large declines in one week but the selling was less than ½ of the previous large decline. The DOW declined 1175 points and the Strength indictor was -224 showing a lot of selling intensity.
The next time the DOW declined 1,032 points the Strength indicator was -58. The selling was less intense. While this does not mean the market will go higher the next day, it’s a signal that the intensity of the selling was not as strong as the previous 1,000 point decline as we should look at the next day’s opening for an opportunity to go long.
The next day the DOW advanced 330 points.