RELATED TOPIC --> | Up/Down Volume and Lowry's 90% days | PowerStocks TroughFinder |


PowerStocks Research tracks the daily volume of shares that advance and price and those that decline in price. We showed in our seminal research paper "Up/Down Volume and Lowry's 90% days" how powerful this data was to predict intermediate and long term market bottom reversals, as well as provide advance warning of market pull-backs and crashes.

We come to one final but important use of volume based market breadth data and that is the Volume Demand/Supply Trend. We define the DEMAND trend by the trend in up-volume and SUPPLY by the trend in down-volume. The charts below are more recent data taken from The Weekly JSE Pulse (WJP)

For Buying Demand we track the daily UP-Volume (volume of advancing shares). In a rising market we need to see rising demand to sustain it. A rising market with falling demand hints at a weakening market that is about to encounter a reversal. An incredibly effective method to track the base demand (minimum demand) trend is to plot a 5-day (1 week) exponential moving average of the daily demand and then connect the troughs of this average together to find the base trend (see the white line on chart on left). The market goes up in growth spurts and this allows us to remove the effects of the powerful spurts to measure base (minimum) demand trend. Divergence in base demand points to market reversals. This becomes incredibly powerful when combined with the Lowry's 90% and 80% days theory, to confirm your reversals.Backtests done by us confirm that buying and selling the market using this trendline to be highly effective in generating profitable trades and minimising your risk.

For Selling Pressure (Supply) we perform the same exersise with daily down-volume data. The difference with this chart though is we connect the peaks of the 5-day down-day average to find a selling pressure trend line. In a rising market we like to see a flat or even declining selling pressure. This is best as a confirmation tool and it is not as effective to time the market with this trendline as it is with the demand trendline.

Let us examine the power of tracking DEMAND and SUPPLY in determining market trends with the charts below covering the great 2008 Crash:

We see that the warning bells were ringing between 23 January and 23 March already, as demand was waning as the market was rising. It is amazing to think that all our market timing models had somehow sensed this and headed for the safety of their bank accounts already. We note that the trough is marked by no definitive demand trend except large volatility as buyers step in on the sell-off's, but look at the big 5-day peak-demands generated at the Lowry's 90% signals at 1, 2 and 3.

This peak demand is useful when used in combination with our Lowry's signals. Obviously, with the massive demand generated as buyers came flocking in at the trough, the demand average curve was likely to suffer a lack of discernible trend and a massive fall down to point 4 as the 5-day rolling average worked through the system but this was not a cause for concern, merely the averages settling back to normality after the binge-buying. "Normality" in this case was a new bull market where the demand trend once again embarked on its steady upward march. If after point 4 we saw no convincing upward demand trend, we would have assumed there was no conviction behind the rise and this was merely a snap-back rally.

And therein lies another important lesson imparted by Lowry Research - regardless of the impressiveness, frequency and magnitude of the 90-90 events, we cannot call the commencement of the new bull market unless the demand maintains a steady upward march from the trough of the crash. The 90-90 events create the conditions for new bull markets, but the steady demand rise confirms its robustness.

The supply-side (selling pressure measured by down-volume) chart also demonstrates its usefulness below

Again, we see warning signals from 18 February 2008 already as selling pressure mounts despite the markets rise. This is is classic DISTRIBUTION (see our paper on The 5 Stock Market Cycles) as investors take profits by selling to the laggards who are willing to pay over-inflated prices for their shares. Sooner or later the demand wanes and the selling pressure rises leading to tipping points where sellers outnumber buyers and that's when the markets fall. For this reason the selling pressure indicator is an excellent leading-indicator (predictor) for market tops. You can see that multiple warning signals were given with each JSE peak leading up to the final one that crashed on 20th May 2008. Note, as we observed from our research in the previous sections how selling pressure peaks-out near the market bottom.

Sooner or later the selling pressure abates and we have a SUPPLY-SIDE reversal (shown by the yellow arrow) where the 5-day average down-volume trend line starts making downward moves as opposed to all the upward moves of the selling bouts leading up to the trough. As you can see, using this reversal of selling pressure trend on its own would have made quite a good signal for the market trough as you would have discerned the trend at about 15th December 2008.

Finally we measure the NET DEMAND FLOW which is the 5-day demand trendline subtract the 5-day selling pressure (supply) trendline. This gives us the average 5-day net advance volume. If it is positive it means average 5-day up-volume exceeds average 5-day down volume, and vice versa. We generally like to be in the market when this value is on the positive side. Even if demand is increasing, if supply continues to exceed demand, this will exert negative pressure on JSE prices. So the demand flow shows us if demand is increasing and if it exceeds supply (which will lead to increasing prices)  A fast switch from negative demand flow to positive demand flow (as shown below) also marks key market bottoms or reversals. The net demand flow triggered a BUY some 4 days before the 5 July trough shown below!

As you can see from the above charts, as at 25th August 2009, despite the market showing a slight pull-back, we are not that concerned due to the continued presence of rising demand and weakening supply and a positive net demand flow.

Markets are driven by the laws of supply and demand, and no other metrics capture these dynamics as elegantly as Up-Volume trend and Down-volume trend. We have showed how weakening demand accompanied by increased selling pressure is a harbinger of bad news to come and can be used to avoid serious market corrections and crashes. The demand trends can also be used to confirm strength or weakness in conjunction with our other breadth indicators.

Demand/Supply Trends used in conjunction with Lowry's ratios during a market crash can provide uncanny accuracy in timing major market bottoms. It almost makes you want to wish for a crash.

RELATED TOPIC --> | Up/Down Volume and Lowry's 90% days | PowerStocks TroughFinder
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