Thursday, December 23, 2010

The Demand Index and The Light Switch

Today's market action gives me an opportunity to follow up on the post I did earlier this morning about the Demand Index.  This 30 minute chart of the SP-500 futures was snapped just a few minutes ago and uses a True  Strength Index magnification of (25,13) and a Demand Index setting of (13).
This chart should give you an idea of the power and potential usefulness of the Demand Index.....  
Light switch on (positive indicator reading means buying pressure exceeds selling pressure - price goes up).
Light switch off (negative indicator reading means selling pressure exceeds buying pressure - price goes down).
Pretty kewl.  (And kinda like cheating, but don't tell anyone).
Click on the chart to ENLARGE


  1. I appreaciate all the work you do and the time you put into your technical analysis
    But when it comes to gold/silver I just think short term TA doesn't really factor into future price projections.These markets are the most manipulated in the history of the markets by the bullion banks and others such as the FED etc. .Their prices have been suppressed for a number of years.So i could easily say gold/silver are extremely oversold and the price should go up big time.Long term TA is great ,no problems with that --but when you are dealing with so much manipulation just can't get to excited about these short term indicators .For every indicator that says gold/silver is due for a big correction ,there are just as many that say the opposite.
    do you ever take into consideration the fundamental factors, such as the demand for physical silver/gold is at a all time high, Bernanke is going crazy with QE, Euroland is a disaster-the list goes on and on-sometime fundamental factors can play a much bigger role the just technical analysis.

  2. Hopefully freestockcharts gets this soon. I'm happy with my brokerage account. Don't really want to switch just for the software, although it looks really good. Thanks for the insight.

  3. Robert - I do not necessarily disagree with any of your thoughts. How do I make money from them, unfortunately, is my question? Buy and hold?

    Since the day I started this blog (June 11) to this very day, GDX has appreciated 20%. GLD has appreciated right around 10%. GDXJ has appreciated the most - 35%.

    OK. So if I had spent my time pondering the physical demand for gold, the actions of Bernake, concerned myself with the Euroland disaster, and the rest of the list, I would have dutifully held these three securities and have a blended gain of something in the neighborhood of 20%. Is that what you have in mind Robert?

    Has this short term technical analysis of mine resulted in inferior results? That is what I think you are saying.

  4. Mike - I have not switched my brokerage account either. If you are interested in using the software, I believe you simply give them your email address and setup a user name with password. No strings attached. You can then choose to use the software to either set up a paper trade account, or use it as a normal account without funding it. That is what I have done, anyway.

  5. Hi John, I notice you are using 4hr charts when you use the Demand Index. If you use the Daily charts on the symbols you used it's still above zero (at least on my charts). Actually on the 4Hr chart the silver contract shot up to about zero at yesterday's close. My question is, I wonder why the 4hr instead of daily? Maybe it's just your experience or "feel" for the situation.
    Thanks so much for the work you do and share.

  6. Hi Mahlen - thanks for your great question.

    To cut to the chase, I think it's just my experience or "feel" for the situation.

    Mahlen, as you know, there are all kinds of time frames available for our consideration. And as I am trading a situation I actually flip through these various time frames somewhat continuously - like a guy changing TV channels - looking for something more interesting to watch. As I look at these different representations of 'reality' I am also assessing how these time frames behaved in the recent past with respect to price movement.

    I regard all time frames as 'truth'. However, when I find a particular time frame or two that seem to align with my interests, I stay riveted on them - studying and considering their movement with respect to price movement.

    I am presently short two contracts of the S&P. In effect, I have placed a $125,000 bet that the stock market is going to drop from here. And I have been using this same 4 hour time frame to guide me.

    Interestingly, when I consider a shorter time frame, say 1 hour, it would have thrown me out of the trade for a loss - as price rose sharply at the close on Thursday - on that time magnification the ZERO crossover on the Demand Index should have scared me out of my shoes.

    But as the 4 hour chart had given me a clear vision of 'reality' that was aligned with my interest in holding the trade - I decided to just stay with the trade for another day. (Actually I think this is a great trade for about another 2-3 weeks).

    Mahlen, the subject of using the various time frames for successful trading is a fascinating one. I hope one day to have some kind of mastery over it, but for now it is more 'art' than 'science' to me. Perhaps it will always be more 'art' than 'science'. I don't know.

    In the mean time I try to keep an open mind and use my analytical skills as best I can. As long as I am correct more often than incorrect, and keep my position sizes small, I should continue to do OK as I learn.

  7. John when you say "$125,000 bet", you mean two contracts totaling $1250 with 200 underlying shares right? Just checking..

    Although I've slimmed my positions down considerably, I do think the market will continue to gain value for at least the remainder of December.

  8. Daniel - each contract controls about $62,500 of the S&P 500. I have no idea what these contracts actually cost me as I buy them on margin. They are not 'payed for' out of my cash balance as would be the cash if one were to buy a couple of call options.

    Each single point the S&P 500 moves is either a $100 gain or loss for me when I 'buy back' the contracts I 'sold'.

    So if the S&P drops from 1250 to 1200 (as I think it will) these two contracts would add $5,000 to my pocket. Now if the S&P goes to 1300 and I 'buy the contracts back' at that price, I would lose $5,000 of the money in my pocket. OUCH!

    Futures are highly leveraged trading instruments and not to be taken lightly as they can break your piggy bank real quickly if you either don't know what you are doing or are dealt a bad hand at the card table and don't fold fast enough. LOL