Steidlmayer Software, Inc.

Capital Flow Market Discussion Spring 1997

This edition of Capital Flow Market Discussion originally appeared in the Spring of 1997.

In no way is Market Discussion intended as a recommendation of a particular trade. The information presented below is for informational in educational purposes only. Steidlmayer Software, Inc. assumes no responsibility for the results of any particular trade.

Steidlmayer Software's strategic approach to the market is one of using computer processing to distill better trading opportunities. We believe that computer processing is the key to the future for trading more effectively.

Market activity is a distinctly different entity from price activity. Price only represents a small part of what the market is doing. The price is really a portion of a much larger data mass. It is the shift between market activity (or data masses) that allows the market to build momentum and momentum is what is in control of the trade. The market is built in to segments of activity and naturally shifts between these segments. Our mission in this month's market discussion is to demonstrate this phenomenon to you visually with examples from our Capital Flow Software.

Vertical efficiencies

Common sense tells you there are two directions that can be assigned to market activity when it moves directionally vertical (up or down) The vertical efficiency study that we are focusing on for this month helps define the consensus of market participants as to whether the market is moving higher or lower. The dots help show where buying or selling is starting or ending and depicts the rotation of consensus from green ( a buying consensus) to red ( a selling consensus). The red or green dots help the trader determine starting or stopping points for vertical market activity. The dots also denote certain market phenomenon i.e. red dots appearing above green dots depicts short covering rallies. They show time frame contrast as to consensus and help determine which way traders are playing the market.

The activity is displayed in the software by highlighting spots of horizontalness within vertical market activity that show up as colored dots on the screen. Naturally a trader is concerned when he thinks the markets up move is over or when a down move is over. Since the market is described as moving directionally we have named our study "vertical efficiency" where we show the consensus of market activity as either higher or lower. When the study shows up as green the consensus is higher and when the study displays red the market consensus is lower. The utility of the study is to help you decide if the markets move is over or continuing.

The study appears on the screen as either individual red or green dots or as clusters of dots. There is key market information contained in the dots in relation to where the dots occur--whether the market is trying to rally or break above or below their location or if the dots appear individually or as clusters.

A cluster of dots means the market was only able to produce horizontal activity and may be shutting off a direction in the market. Individual dots also have meaning in reference to where they occur in relationship with other dots. For example if there is a single green dot over 8 red dots in a cluster and the market moves sharply above the red dots this is a signal that the market should be starting a new direction to the upside. There are many different nuances involved with deciphering the meaning of the vertical efficiency study so we are going to start with basic examples. You'll find this study is a good reference point to trade from especially when used in combination with other studies. Next month we will get into how vertical efficiencies and the horizontal line studies can be used in combination.

The following example is contract KO on 4/30. To illustrate how the vertical efficiency study shows the consensus of market participants as well as the duration of rotation of the consensus start at the left hand side of the screen. In the example you can see that the first cluster of marks you see are colored green. The markets move to the upside has been stalled as noted by the presence of the green vertical efficiencies (which is a sign of horizontal development.) The markets consensus rotates and a few bars later we get red dots indicating the rotation of consensus of the market has turned down. The market tries to rally above the dots to no avail and the red dots (or bearish consensus) takes over in the short term and we get a small break underneath where the rotation of consensus took place. The market reverses with out producing a vertical efficiency so there is no horizontal development present until the market reaches the area of where the change in consensus occurred. The market pauses at this reference point ( Which is important to note) and moves vertically above the single red dot indicating a new direction to the upside is underway. The one single dot is important to note because it indicates a lack of complete horizontal development. If there were another cluster of red dots instead of a single dot it would indicate horizontal development at the same level the market failed at previously and would be a good indicator to sell. The market continues to the upside with little difficulty until we get a single green dot which is a sign the market may be moving horizontally and alerting us to a possible change in the markets condition. The thing that may be confusing to some is the question of why if the vertical efficiency is green it is called an indicator alerting us that the market may be changing? The answer is the consensus of the market had been green and moving up -with no real previous horizontal development-- but the vertical efficiency study is a sign of horizontal development so in the market the green dot is an indication of a pause in the market condition. It alerts you to a possible change in market activity. After the single green dot we shortly thereafter get a single red dot which again shows a pause in the markets activity and a rotation of the consensus to the downside. The market immediately turns vertical to the upside taking out both the small pauses in the markets condition and continues to the upside. If you are familiar with market profile you probably have heard of minus development. The single green got followed by the single red dot in this example is a form of minus development. (for further explanation of minus development see New Market Discoveries by J. Peter Steidlmayer) The single red dot is an indication that the market could not break and the original market condition that started the move to the upside is still in control. The computer can read and alert you to when these conditions in the market are present and therefore distill better trading opportunities to you.

In the following example contract ACK we have a similar situation to the above example in that the market has a rotation of consensus at the top of the range. The market first shows a pause and possible change in market conditions with a single red dot. Then the consensus rotates and you get a single green dot followed by a single red and finally a single green. When the market breaks below the area of where the consensus of rotation takes place we can feel comfortable selling against the horizontal development using that level as a place to manage our trade from. It is also important to note that the vertical efficiencies all appeared around the same level. The market was developing horizontally alerting us to a possible change in the markets condition. When the market gets below the four vertical efficiency studies it is telling us that the market is being shut off to the upside thus eliminating a direction.

IN NO WAY IS THIS DISCUSSION INTENDED AS A RECOMMENDATION OF A PARTICULAR TRADE. THE INFORMATION PRESENTED ABOVE IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY. STEIDLMAYER SOFTWARE ASSUMES NO RESPONSIBILITY FOR THE RESULTS OF ANY PARTICULAR TRADE.

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Last updated: 05/23/2008