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The Three Major Auction Market Discoveries
Form the Basis of
Auction Market Value Theory

Donald L. Jones
November 22, 2005
CISCO Futures©

Three discoveries form the foundation for practical auction market theory and practice. These are 1) the Market Profile, 2) the Meta-Profile and 3) the Overlay Demand Curve.

The first discovery, Market Profile, found the analytical link between volume and value, plus developing an activity graphic; by using a daily trading audit data base released by the Chicago Board of Trade. This data base, The Liquidity Data Bank (LDB), carried each future traded at CBOT on an end-of-day report, listing for each price, the volume and times traded.

Meta-Profile, also called Tick-TPO Profile identified the analytical link between tick activity and value. Source data for Meta-Profile is a record of trades or ticks, either real time or historical. In addition to value, an activity graphic similar to that found for the Market Profile, can be constructed from the tick data. Meta-Profile opens value analysis to all tick producing markets, futures, forex, options, equities, etc. Time frames for analysis can be adjusted for day markets, for night markets or a combination as desired.

Thirdly, the Overlay Demand Curve extends Meta-Profile value analysis to multi-day timeframes. Longer timeframe value is found from frequency of ticks over the extended timeframe, just as with the daily Meta-Profile. Overlays are notable for identifying market condition, locating those times of balance, the periods of directionality and the transitions in between.

The Market Profile, D1

The seeds of value theory were sown by an unlikely event in practical market analysis. In 1985. J. Peter Steidlmayer, a well known member of the Chicago Board of Trade, revealed that his trading basis was value, not price (ref4). But his value is not the long term value sought by the economic fundamentalists. It is value discovered from one day's trading and changes daily in response to market forces. Steidlmayer's value comes from calculating price-over-time. He offered it as an algebraic formula: value = price + time. Dimensionally, price and time are not compatible; it is not possible to add price ($) to time (minutes) to get value ($). The formula value = price + time means that acceptable (fair) prices will be traded more than unfair (too high or too low) prices. Over a day's trading, volume at price will show which prices are accepted by heavy trading and which are rejected by light trading. The assumption is that the price with the most volume is the center of value.

Information from the Market
Steidlmayer observed that a price - activity chart often looked like the well known bell curve, or a normal (gaussian) distribution. He chose the bell curve for his model of market activity, for it's distribution function.

The CBOT Liquidity Data Bank (LDB)
Steidlmayer was instrumental in creating the Chicago Board of Trade Liquidity Data Bank (LDB) report, an end of day audit of all trading on the exchange. On the LDB, every future at the CBOT lists volume and time at each price. Volume at each price is further subdivided among the four types of trading members on the floor of the exchange. The LDB report format included the bell shaped "profile" of trading. This is a chart showing the trading at each price, as identified by time; breaking the day into half-hour reporting periods of the exchange cleared trading. The sample LDB report in figure 1 shows both the Market Profile graphic, the cleared volume at price, and the value area (70% VOLUME SUMMARY). Included are the distributed volumes generated by the four classes of CBOT members (%VOL, %CTI1, 2, 3, 4), which are not involved in profile analysis.

The Market Profile Graphic
Market Profile is an activity chart depicting the frequency of occurrence of each price for each half-hour time bar throughout the trading day. Often bell shaped, the Market Profile curve (BRACKETS in the LDB data of figure 1), normally peaks somewhere around the peak volume price. This can give one a sense of the center of value (ref4, ref7a). However, in the Market Profile construct, value is centered at the peak volume price. By analogy with the assumed bell shaped, gaussian distribution, Steidlmayer defined a 'value area' as the first standard deviation, the middle (approximately) seventy percent of the posted volume on the CBOT LDB report (ref7 pg90).

While a profile graphic is defined as the temporal distribution of trading activity, located by cleared price at time, the value area is defined by cleared volume. The intermingling of these two concepts has caused confusion, especially since observationally it is often true that the center of volume based value is near the center of trading activity (see figure 1, below). The general agreement between center of value (cleared volume) and the peak of the Market Profile (activity over time) can fail in markets that are moving from balance to directionality or vice versa (ref11a).



                       CBOT VOLUME REPORT
                    TRADING DATE:  11 28 00
               CONTRACT: DEC 00 DJIA (CBOT)  DAY      
 
      PRICE   VOLUME  %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
      10655        4   0.0  50.0   0.0   0.0  50.0 C
      10650       68   0.2  51.5   0.0   0.0  47.1 C
      10645      112   0.4  75.9   0.0   8.9  14.3 C
      10640      140   0.5  61.4   6.4   0.0  29.3 C
      10635      144   0.5  63.2   0.0   2.8  33.3 C
      10630      292   1.0  55.5   0.0   0.0  43.5 C
      10625      306   1.1  70.9   0.0   1.0  27.5 C
      10620      734   2.6  56.4   2.2   2.6  38.3 C
      10615      520   1.8  61.3   1.2   0.8  36.3 BCDJK
      10610     1104   3.9  55.3   7.1   1.5  35.9 BCDEHIJK
      10605     1396   4.9  53.9  10.5   3.1  32.2 BCDEHIJKL
      10600     1384   4.9  47.0  12.5   2.2  38.2 BCDEHIJKL
      10595     1234   4.3  62.7   1.4   2.4  33.5 BCDEHIJKL
      10590     1572   5.5  55.5   4.3   2.8  37.3 BDEHIJKL
      10585     1256   4.4  60.4   2.1   3.4  33.8 BDEGHIJKL
      10580     1084   3.8  60.9   1.8   3.1  34.0 BDEGHIJKL
      10575      786   2.8  51.8   5.1   2.4  40.5 BDEGHIJKLM
      10570      898   3.2  64.7   3.8   1.7  29.6 ABEGHKLM
      10565     1248   4.4  54.9   0.2   3.1  41.7 ZABEFGHLM
      10560     1214   4.3  58.6   1.1   2.6  37.6 ZABEFGHM
      10555     2076   7.3  49.0   3.9   1.2  45.9 Z$ABEFGMNO
      10550     2075   7.3  53.2   3.2   1.6  41.9 Z$ABEFGMNO
      10545     1528   5.4  49.0   5.0   2.7  43.3 Z$BEFMNO
      10540     1942   6.8  52.2   1.1   2.8  43.9 $BEFMNO
      10535     1468   5.2  46.5   2.8   1.6  49.0 BEFMNO
      10530      962   3.4  45.9   5.8   3.0  44.8 BMNO
      10525      266   0.9  52.3   0.0   2.3  44.7 NO
      10520      166   0.6  38.0   0.0   1.2  59.6 NO
      10515      152   0.5  23.7  11.2   5.3  59.9 O

    70% VOLUME SUMMARY
      10605    20798  70.3  53.1   3.2   2.5  41.2 Z$ABCDEFGHIJKLMNO
      10535

   Copyright Board of Trade of the City of Chicago 1993.  ALL RIGHTS RESERVED.
   Market Profile is a Registered trademark of the CBOT.
   Some prices are omitted to condense the display.

Figure 1. Liquidity Data Bank (LDB) Report for CBOT Dow Index, Nov 28, 2000.
Columns of interest: 1 is price, 2 is cleared volume and 8 is the Market Profile graphic (BRACKETS). The letters in the BRACKETS column, (called TPO's), represent 1/2 hour timeframes, or mini-days. Z is the period 07 to 07:30, $ is 07:30 to 08, A is 08 to 08:30, B is 08:30 to 09, and so on, with the TPO 'O' covering from 15 to 15:30. The lower part of the display entitled '70% VOLUME SUMMARY' is the 'value area' will be discussed in the section 'Steidlmayer Volume'.

The market of November 28 started with the open at 10565 (Z period), forming a relatively quasi-bell shape in Z, $, A and B periods followed by a substantial run-up in C period. For the rest of the day, trading stayed within the bounds of 10615 to 10515. The profile graphic for the day is reasonably bell shaped, although the top is rather flat. Activity is centered around 10575, where trading occurred in ten of the seventeen half hour periods.

Steidlmayer prescribed a format for analyzing the profile, illustrated in figure 2.


          COMMODITY  --  DJIA (CBOT)  DAY      JUN 04  April 1, 2004

             Price  Brackets 
           103950 D          | Upper Tail
           103900 DE          |
           103850 DE          | Upper Range 
           103800 DE          | Extension
           103750 DEFK        |
           103700 DFJKLP      |
           103650 CGJKLP       |  
           103600 CGHJKLMP     |
           103550 zCHIKLMNP    |                |
           103500 zCHILMNP     | Value Area     | Initial
           103450 zACHIMN      | 70% of Trade   | Balance (first two periods)
           103400 zABCHMN      |                |
           103350 yzABCMN      |                |
           103300 ABCN         |
           103250 BC          | Lower Range
           103200 BC          | Extension

    Some prices are omitted to condense the display.

Figure 2. Profile Structure.
The 'Initial Balance' is typically the range of the first two trading periods of the day; here it is yz, 07:00 to 08:00, although the time frame can differ from market to market. Initial balance is ascribed to the professional traders dominating the market and seeking a 'safe' trading range for the day. Trading outside the initial balance is called a 'Range Extension' and is considered a breakout of sorts. Single TPO's at the top or bottom of the range are named 'Tails' so long as there are at least two single prints. Tails indicate excess, the market having auctioned too high or low and thus experiencing quick rejection.

Steidlmayer also categorized a number of shapes of profiles; neutral day, non-trend day, normal day, normal variation day, trend day and two-part day, each signifying trade offs between short term and longer term traders. He devoted a chapter in his 1989 book (ref7) to the 'Steidlmayer Distribution' for analyzing markets as they develop. The fundamental concept is that profiles display a normal distribution and that knowledge can be used to understand the "present tense development of an ongoing distribution".

Another element of the Steidlmayer analysis is discrimination between the short time-frame traders such as exchange floor members who must trade regularly each day and long time-frame traders who are more selective and active in un-balanced markets. This was tied into day-types. It is a way of determining who is in control of a market, the long term players or the short termers.

Steidlmayer's Value
A single day's value is 'local', guided by the events of the current day. Steidlmayer defined value in terms of the volume in the audit data of the Liquidity Data Bank. Referring to figure 1, volume is the second column. The definition of value is the price range encompassing seventy percent of the cleared volume, centered about the high volume price. This is the "first standard deviation of volume" (ref7, pg 96). An example of Market Profile value area is in figure 1, near the bottom, at the line entitled 70% VOLUME SUMMARY. Peak volume in column 2 is 2076 at the price 10550. The volume value area calculated is 10605 to 10535, as reported by the CBOT.

Putting Things in Perspective
Steidlmayer understood that he was locating the significant price areas where traders were using or not using the market (ref7, p23). With his belief in the bell curve theory of day market structure, the concepts of value (+/- one standard deviation), acceptance (heavy trading) and rejection (light trading) were built. This was long before the econophysicists proved the market distribution function was (mathematically) complex, self organizing and driven by feedback (ref2, ref3). Steidlmayer was using the feedback, the market's voting, to generate the profile, the shape of the trading. Value, of course, came from the audited volume, centered at the high value price of the day.

When the works of the econophysicists appeared it became clear that the Market Profile and later,the Meta-Profile, were decoding the market feedback. This led to the realization that profile methodology was a fundamental element in auction market theory.

Notwithstanding the limitations (requirement of CBOT LDB (audit) data and end-of-day only), the Market Profile and the value area will probably be seen as the outstanding discovery in auction market analysis in the twentieth century. In one leap of insight, Steidlmayer found a way to measure current market value. The utility of (profile) value became clearer with the work of the econophysicists who demonstrated that the accepted Capital Market theory of the economists (ref1) rested on an untenable (gaussian) distribution function. If, as proposed by the econophysicists, the market is complex, self organizing and driven by feedback then the market can not be described by any mathematical distribution function. (It will be shown in the next section on Meta-Profile that Steidlmayer's reliance on the bell shaped distribution is not a requirement for finding value.) Consequently, market generated data is the only known foundation for market understanding. Only market data can be used to explain market behavior. Profile methodology is the only tool so far found that decodes the market feedback. And value, not price, guides the way.

The Tick-TPO or Meta-Profile, D2

Requiring audited (cleared) data for Market Profile methodology excluded most of the auction market world. This problem was solved in 1987 when the Tick-TPO Profile was announced (ref10, ref10a). Tick-TPO Profile, later called Meta-Profile, is a methodology that generates the profile graphic and value area from tick data, either within a day or at end-of-day.

The Meta-Profile Market Graphic
Meta-Profiles generated by ticks create both a profile graphic and a value area. Profile graphics from the LDB audit data and from ticks are usually quite similar and in balanced markets give virtually identical profile charts. Value area, too, is quite close between the two methods, except in directional markets (ref11a). Unlike the Market Profile, Meta-Profile construction and analysis does not rely in any way on the tick data having a gaussian distribution. Other features of Market Profile analysis, such as day types and reliance on the gaussian distribution of the profile graphic are not used in Meta-Profile based analyses. Meta-Profile value comes from TPO counts, with no reference to the shape of the Market Profile type graphic, except that clustering appears within fair value. TPO counts play the same role for Meta-Profile value that volume does for the Market Profile value area.

A Tick - TPO Profile With Half-Hour Timeframes
A Meta-Profile representation of the data for the Dow Index of figure 1 is in figure 3. Price bar is on the left, then the TPO count (#), next are the Profile TPOs, followed by all the half-hour vertical bars, stated in TPOs. Value at any point in time (indicated by the TPO half-hour bar columns dashed lines) is the middle seventy percent of the TPO counts up to that time. The vertical bars on the TPO columns, the value area to that point, change as value changes throughout the day.

For instance, at the end of 'A' period there is one TPO at 105700, two at 105650, two at 105600, three at 105550, three at 105500, two at 105450 and one at 105400. The center is at 105550, indicated by the arrow '>', and the value area is 105600 to 105450 (the vertical bars).

At end of day, the value area lies between 106100 and 105530. The center of trading for the day is at 105750, with 9 TPOs (BDEGHIJKL). By comparison, the Liquidity Data Bank of figure 1 reports a value area of 105980 to 105330, with the peak volume of 2076 at 105550. There is reasonably good agreement between the two, considering that two different data sets are used and there is rounding from the large price compression.



                 Meta-PROFILE* REPORT FOR 11 28 00
             COMMODITY  --  DJIA (CBOT)  DAY      DEC 00


  Price   #  Brackets               Segmented Auction
 106550   1  C                             C
 106500   1  C                             C
 106450   1  C                             C
 106400   1  C                             C
 106350   1  C                             C
 106300   1  C                             C
 106250   1  C                             C
 106200   1  C                             C
 106150   5  BCDJK                      B  C  D                 J  K
 106100   8  BCDEHIJK                   B  C  D  E        H  I |J |K |  |  |  |
 106050   9  BCDEHIJKL                  B  C  D  E        H  I |J |K |L |  |  |
 106000   9  BCDEHIJKL                  B  C |D  E        H  I |J |K |L |  |  |
 105950   9  BCDEHIJKL                  B |C |D |E |     |H |I |J |K |L |  |  |
 105900   8  BDEHIJKL                   B |  |D |E |  |  |H |I |J |K |L |  |  |
 105850   9  BDEGHIJKL                  B |  |D |E |  |G |H |I |J |K |L |  |  |
 105800   9  BDEGHIJKL                  B |  |D |E |  |G |H |I |J |K |L |  |  |
 105750  10  BDEGHIJKLM                |B |  |D |E |  |G |H |I |J |K |L >M >  >
 105700   8  ABEGHKLM                A |B |  |  |E |  |G |H |  |  |K |L |M |  |
 105650   9  yABEFGHLM         y     A |B |  |  |E |F |G >H >  |  |  |L |M |  |
 105600   8  yABEFGHM         |y    |A |B |  |  |E |F |G |H |  |     |  |M |  |
 105550  10  yzABEFGMNP       >y |z >A >B >  >  >E >F >G |  |            M |N |P
 105500  10  yzABEFGMNP       |y |z |A |B |  |  |E |F |G |  |            M  N  P
 105450   8  yzBEFMNP          y |z |  |B |  |  |E |F |  |  |            M  N  P
 105400   7  zBEFMNP              z    |B |  |  |E |F |  |               M  N  P
 105350   6  BEFMNP                    |B |      E |F |                  M  N  P
 105300   4  BMNP                       B |                              M  N  P
 105250   2  NP                                                             N  P
 105200   2  NP                                                             N  P
 105150   1  P                                                                 P

TPO Analysis
CENTER      105750

VALUE AREA FROM TPOS
 UPPER      106100
 LOWER      105530
 
Figure 3. Meta-Profile for DJ Index, November 28, 2000
Source data is ticks.


Meta-Profile and Tick-TPO Profile is copyright of CISCO, 1987, 1990
Some prices are omitted to condense the display.

Meta-Profile Value
Meta-Profile recognizes that the profiles are only approximately bell shaped, (clustering is a better description), but in balanced, non-directional markets trading does indeed cluster about a 'center of value'. The 70 percent rule used by Steidlmayer applied to the Tick-TPO's finds essentially the same value area as does the cleared volume, end-of-day Market Profile value area (70% VOLUME Summary (ref10)).

Examples of five Meta-Profiles in figure 4 illustrates profile structure in a balanced market. It is clear that the five days of trading are bounded by 110800 and 108200. This is a 'balanced' market (as discussed in the next section on Overlay Demand Curves). Even in this well-behaved environment the profiles are at best only quasi-bell shaped. Two of the days, October 31 and November 6 have double distributions. It does not appear that there is any analytical value is associating the gaussian distribution with profiles. Furthermore, it is clear that value varies from day to day even in stable, balanced markets.

Meta-Profile value is based on the profile (clustering) structure. For October 31 there are actually two values, one centered at 109200 for early in the day and a later one at 110200. This would be called a double distribution up day in Market Profile parlance and could presage directional movement (ref14, pg 26ff). The longer term view of profiles, discussed in the next section on the Overlays, does not seem to support the day types of Market Profile theory, as illustrated in this example.



                   The CISCO five day Meta-Profile* display

     DJIA (CBOT)  DAY       DEC 00   First date: 10 31  0   Last date: 11  6  0

             31              1              2              3              6
     110800                                                         N             
     110700                                                         LN            
     110600                                                         HKLN          
     110500 LM                                                      FHIKLN        
     110400 KLM           ABC                                       EFGHIJKLN     
     110300 KLMN          ABC                                       EFGHIJKLMN    
     110200 IJKLMN        ABC                                       DEGIJKLMN     
     110100 IJKLN         ABCD          zB                          CDEJMN        
     110000 IJK           ABCD          yzB                         CDEM          
     109900 HIJ           yzABCDEFN     yzABGK                      CEM           
     109800 HI            yzACDEFGHN    yABCFGHK      y             C             
     109700 H             yDEFGHKMN     ABCDFGHJKLM   y             C             
     109600 GH            DEFGHIKMN     ACDEFGHIJKLMN yz            BC            
     109500 AG            GHIJKM        ACDEFHIJKLMN  yz            BC            
     109400 AEFG          IJKLM         DEFILN        yzA           BC            
     109300 yzABEFG       IJLM          LN            yA            B             
     109200 yzABEFG       JLM           N             ACD           B             
     109100 yABCDE        L                           ABCD          AB            
     109000 yABCDE        L                           ABCDMN        yzAB          
     108900 BCD                                       ABDEMN        yzAB          
     108800 BCD                                       ABDEMN        AB            
     108700 BC                                        ABEFIMN       A             
     108600 B                                         EFILM                       
     108500                                           EGHIJKL                     
     108400                                           EGHIJKL                     
     108300                                           GHJKL                       
     108200                                           GK                          


Figure 4. Five days of the DJ Index in a bounded, balanced market.
Five day Range 110800 to 108200 is $2,600.

*Meta-Profile is copyright CISCO 1987, 1990
Some prices are omitted to condense the display.


                   The CISCO five day Meta-Profile* display

     DJIA (CBOT)  DAY       DEC 00   First date: 11  7  0   Last date: 11 13  0

              7              8              9             10             13
     110700               yz                                                      
     110600               yzAE                                                    
     110500 yzABFG        zAEF                                                    
     110400 yzABFGHIJN    zABEFGHI                                                
     110300 yABEFGHIJKN   zABEGHIJK                                               
     110200 ABDEFGHIJKN   BCDEGHIJKL                                              
     110100 BCDEFJKLMN    BCDEIJKLMN                                              
     110000 BCDEKLM       BCDIJKLMN                                               
     109900 CDLM          BCIKMN                                                  
     109800 C             BCIMN                                                   
     109700               BMN                                                     
     109600               BN                                                      
     109500               N                                                       
     109400               N             yC                                        
     109300               N             yCM                                       
     109200               N             yCDMN                                     
     109100                             yCDEFMN                                   
     109000                             yBCDEFLMN                                 
     108900                             yzBCDEFLMN                                
     108800                             yzABCDEFGKLMN                             
     108700                             yzABCGKLMN                                
     108600                             ABCGKLMN                                  
     108500                             ABCGHKLMN                                 
     108400                             AGHKLMN                                   
     108300                             AGHKLM                                    
     108200                             AHIKL                                     
     108100                             AHIK          ACD                         
     108000                             AIK           yzACD                       
     107900                             AIK           yzABCD                      
     107800                             IJK           yzABCDE                     
     107700                             IJK           yzABCDE                     
     107600                             IJK           yABCDEG                     
     107500                             IJK           ABCEFGHI                    
     107400                             IJ            BCEFGHIJ                    
     107300                             IJ            BCEFGHIJLM                  
     107200                             IJ            BFGHIJKLM                   
     107100                             IJ            GHJKLM                      
     107000                             IJ            GJKLMN                      
     106900                             IJ            JKLMN                       
     106800                             IJ            JKN                         
     106700                             IJ            JKN                         
     106600                             J             KN                          
     106500                             J             N                           
     106400                                           N             LM            
     106300                                                         LM            
     106200                                                         LM            
     106100                                                         BLM           
     106000                                                         BKLMN         
     105900                                                         BKLMN         
     105800                                                         BCKLMN        
     105700                                                         BCKLMN        
     105600                                                         ABCKLN        
     105500                                                         ABCJKN        
     105400                                                         yzABCIJK      
     105300                                                         yzABCDIJK     
     105200                                                         yzABCDIJK     
     105100                                                         zABDIJK       
     105000                                                         zABDEIJ       
     104900                                                         ADEHIJ        
     104800                                                         DEHI          
     104700                                                         DEFGHI        
     104600                                                         EFGH          
     104500                                                         EFGH          
     104400                                                         EFGH          
     104300                                                         FGH           
     104200                                                         FGH           
     104100                                                         H             

Figure 5. Five days of the DJ Index in a directional (down) market. 
Four day range (Nov 8 - 13) is 110700 to 104100 or $6,600.

*Meta-Profile is copyright CISCO 1987, 1990
Some prices are omitted to condense the display.

The agreement between Market Profile and Meta-Profile value in balanced markets validates Meta-Profile methodology. Releasing the constraint of audited data allows profile analysis of equities, options, forex, other futures exchanges and tick producing markets in general. Meta-Profile also permits the value analysis to be performed intra-day. An aspect emphasized by Market Profile, the structuring of a day's analysis around tails (excess, ref 23, p111) and range extension, as in figure 2, is little used in Meta-Profile analysis. The reason for this is that in the Meta-Profile view markets need not be gaussian and so the appearance of a quasi-bell shape early in a trading day does not lead to the conclusion that the quasi-bell's peak will continue to be the market's focal point the rest of the day. This is obviously true in double distribution days (examples: Oct 31 and Nov 6 of figure 4). It is true as well for Nov 2 and 3 in figure 4, where the 'yzA' beginning is nowhere near the ultimate center of trading for the day.

Meta-Profile focuses on value. A consequence of the data base (live ticks) is that value can be examined as it develops throughout the day, as in figure 3. There, by the end of period D (9:30 to 10) the excursion of period C (9 to 9:30) can be seen to have little effect on value (the vertical dashed lines). Although Nov 28 showed a good bit of volatility, the center of value as indicated by the arrow, '>', symbol for each half-hour, moved very little. By the end of the day the clustering is evident in the 105750 region. This day is unexceptional except for the C period run-up and retreat. The clustering is evident, a gaussian distribution is not.

Meta-Profile is the second major auction market discovery. It releases profile analysis from the dependence on a gaussian distribution function, on volume and on audited data. It extends the reach of value analysis to most auction markets. The flexibility of Meta-Profile makes it a useful tool in further studies, as in the Overlay Demand Curve of the next section.

The Overlay Demand Curve, D3

Multi-Day Value in Auction Markets, the Overlay Demand Curve Graphic

From the inception of Market Profile the emphasis has been on intra-day trading. Steidlmayer was a floor trader (local) who developed the Market Profile for a time horizon mostly limited to the current day, based on value location from the previous trading day. While profiles reliably find day value in balanced markets, it is observed that even in such balanced markets day-to-day profile value may fluctuate substantially.

The Overlay was developed to extend the one-day range of the Meta-Profile to longer time-frames. An Overlay is a linear aggregation of profiles. Whereas the profile finds one day value (value area), the Overlay locates value for the time period desired (days or parts of days). Overlay's are especially valuable in identifying balanced markets. They show upper and lower limits (support and resistance), estimate risk and provide a distribution that can be analyzed (the shape can show how demand comes into the market).

Markets are known to be not serially correlated on a day-to-day basis (see ref21, pg 21 for an example). Simply comparing one day's profile to the next offers no firm ground for analysis if the market condition has changed. The goal is to find market condition, where the market is in it's evolution from balance to trend. Markets go through a four step process (ref7b), which can start with balance and end back at balance. A balance will move into the trend phase over a period of time, a part of a day or more. A trend's end and the beginning of a new balance also traverses a transition period governed solely by the behavior of market participants. An orderly four step progression often occurs, but it is not a path the market always takes. There may be a break out from a balance that is quickly followed by a return to balance (false breakout). Or a trend may pause and retrace before continuing on. Any of the four steps may happen in a time as short as minutes or as long as days.

A Balanced Overlay Demand Curve
A way to examine time frames longer than a day is to linearly combine the requisite number of Meta-Profiles, forming an Overlay Demand Curve. The composite telescopes temporal differences into a master, multi-day time frame. As an example, the five days of Meta-Profiles in figure 4 are combined into the Overlay Demand Curve of figure 6.


                         Overlay Demand Curve*

DJIA (CBOT)  DAY       DEC 00   First date: 10 31  0   Last date: 11  6  0
 VOL DETAIL   TK VOL  HITS  TIME: 1=NEAR, 2=NEXT BACK,...
   110800          9   1 1
   110700         20   2 11
   110600         53   4 1111
   110500        155   8 11111155
   110400        274  15 111111111444555
   110300        401  17 11111111114445555
   110200        299  18 111111111444555555
   110100        412  17 11111133444455555
   110000        317  14 11113334444555
   109900        223  21 111333333444444444555
   109800        372  22 1233333333444444444455
   109700        472  23 12333333333334444444445
   109600        385  28 1122333333333333344444444455
   109500        381  24 112233333333333344444455
   109400        299  20 11222333333444445555
   109300        340  16 1223344445555555
   109200        263  15 122234445555555
   109100        228  13 1122224555555
   109000        296  17 11112222224555555
   108900        255  13 1111222222555
   108800        213  11 11222222555
   108700        127  10 1222222255
   108600         77   6 222225
   108500        117   7 2222222
   108400         95   7 2222222
   108300         71   5 22222
   108200         22   2 22

Figure 6. Overlay Demand Curve of DJ Index, Dec 00, for 5 Days
Data is for Oct 31, (5), Nov 1 (4), Nov 2 (3), Nov 3 (2) and Nov 6 (1).
Column 1 is price, column 2 is tick count, column 3 is the number of 
occurrences (TPO's) at each price and column 4 is the days for the TPO's.
For instance, the price 110000 experienced 14 hits (TPO's) of which 4 
came on day 1 (Nov 6), 3 hits came on day 3 (Nov 2), 4 hits on day 4 (Nov 1) and
3 hits on day 5 (Oct 31).

Overlay Demand Curve is a trademark of CISCO Futures 1987.
Some prices are omitted to condense the display.

Recognizing Market Condition in a Balance
Figure 4 is a balanced market. It is observed to be bounded over the five days shown, but the proof is in figure 6, where the physical combination of the five days, the Overlay, forms a single distribution. Also, the mixing of the days (1 through 5) at various prices is a result of price rotating up and down over the five day period, a characteristic of balanced markets.

Overlay Demand Curve Value in a Balance
Value in Meta-Profiles is the middle seventy percent of the cluster. For Overlays the a similar formula is not applied because the profiles are not gaussian curves and volatility spreads them even more. Summing several profiles emphasizes the lack of a gaussian process, instead producing a more squared distribution. For the five day Overlay of figure 6, value is defined from the three TPO level, 110600 to 108300.

The activity is distributed in a single quasi-bell shape, much like the Meta-Profiles from which it is made. The single distribution and price rotation identifies the condition as balance. Center of the distribution is around 109600. Balance limits are obviously near 110800 and 108200; the rules developed for Overlays require a minimum of three TPOs to identify a distribution. For this case the upper and lower limits are 110600 and 108300. The limits are called resistance and support by traders who seek either breakout points for trend starts or directional indicators for trading within the balance (responsive trading). However traders may use the Overlay data is not the point; the fact that they have market generated information about the state of the market is.

A Directional Overlay Demand Curve
Figure 5 is a directional market. Applying the Overlay process to it results in figure 7.


                       Overlay Demand Curve

DJIA (CBOT)  DAY       DEC 00   First date: 11  7  0   Last date: 11 13  0
 VOL DETAIL  VOL   HITS  1=NEAR, 2=NEXT BK,...
   110700         28   2 44
   110600         24   4 4444
   110500        131  10 4444555555
   110400        265  18 444444445555555555
   110300        263  20 44444444455555555555
   110200        285  21 444444444455555555555
   110100        345  20 44444444445555555555
   110000        322  16 4444444445555555
   109900        214  10 4444445555
   109800         82   6 444445
   109700         26   3 444
   109600         10   2 44
   109500         20   1 4
   109400         54   3 334
   109300         54   4 3334
   109200         54   6 333334
   109100         90   7 3333333
   109000        155   9 333333333
   108900        158  10 3333333333
   108800        183  13 3333333333333
   108700        148  10 3333333333
   108600        122   8 33333333
   108500        108   9 333333333
   108400         92   7 3333333
   108300         71   6 333333
   108200         86   5 33333
   108100        113   7 2223333
   108000        133   8 22222333
   107900        143   9 222222333
   107800        168  10 2222222333
   107700        164  10 2222222333
   107600        160  10 2222222333
   107500        113  11 22222222333
   107400        137  10 2222222233
   107300        189  12 222222222233
   107200        161  11 22222222233
   107100        109   8 22222233
   107000        114   8 22222233
   106900         90   7 2222233
   106800         93   5 22233
   106700         54   5 22233
   106600         28   3 223
   106500         32   2 23
   106400         52   3 112
   106300         15   2 11
   106200          8   2 11
   106100         13   3 111
   106000         37   5 11111
   105900         60   5 11111
   105800         55   6 111111
   105700         49   6 111111
   105600         64   6 111111
   105500         41   6 111111
   105400         73   8 11111111
   105300        106   9 111111111
   105200         56   9 111111111
   105100         78   7 1111111
   105000         60   7 1111111
   104900         45   6 111111
   104800         44   4 1111
   104700         12   6 111111
   104600         37   4 1111
   104500         53   4 1111
   104400         34   4 1111
   104300         48   3 111
   104200         19   3 111
   104100          1   1 1

Figure 7. Overlay Demand Curve of DJ Index, Dec 00, for 5 Days
Data is for Nov 7, (5), Nov 8 (4), Nov 9 (3), Nov 10 (2) and Nov 13 (1).
Column 1 is price, column 2 is tick count, column 3 is the number of 
occurrences (TPO's) at each price and column 4 is the days for the TPO's.
For instance, the price 109000 experienced 9 hits (TPO's) of which all 
came on day 3 (Nov 9). 


Overlay Demand Curve is a trademark of CISCO Futures 1987.
Some prices are omitted to condense the display.

Recognizing Market Condition in a Directional (Trending) Market
The five days of figure 5 constitute a directional phase. Again, the imbalance is clear in the Overlay of figure 7, which consists of several distributions. Unlike the balanced figure 5, the prices in the trading days of figure 7 are segregated by time; earlier times are at higher prices, the latest day forms a distribution all it's own at the lowest prices. The activity is distributed in four quasi-bell shapes. There is no central focus for this distribution, it is made of days with quite disparate value centers. There is no balance, there are a number of distributions; the market (condition) is directional.

Overlay Demand Curve Value in a Directional Market
Value was found for the balanced market of figure 6. The concept of value depends on a stable, balanced market, one where upper and lower bounds are apparent. In directional markets no such bounds exist. Price moves and pauses, then moves some more. The pauses are short time frame congestions. A pause may last minutes to hours, sometimes even days. A general rule is that value takes time to develop (value is price over time). Practically, value is not apparent in pauses and so, practically, value is not known in a directional market.

Profiles can Only be Understood in Context (Condition)
Comparing profiles from a balanced and a directional day will illustrate the contention that a single day's profile in an unknown context (condition) is lacking in trading information. Take Nov 2 from figure 4: it ended trading near it's lows (N period). In figure 5, the Nov 8 profile likewise ended near it's lows. There is little to differentiate the two profiles, they both started near their highs, balanced and ended lower. Strictly reading profiles, it would hard to know that the Nov 2 day was part of a balance while Nov 8 was an initiating day for a downside breakout. The Overlays of figures 6 and 7 are perfectly clear. Within the context of market condition, a trader can interpret the profiles of Nov 2 and Nov 8 appropriately.

A Crossover Overlay Demand Curve
Overlays of five days are illustrated in figures 6 and 7. One is a balance, one is directional. In a real market situation, a balance will transition into a trend or directional market that exists for a first day, a second day, a third day, and so forth until the trend then transitions back into balance. The balance or trend will continue only so long as it is supported by market activity. The lengths of these market phases are not predictable, but the Overlay Demand Curve shows the transitions.

A practical question for traders is determining balance from directionality and vice versa. An understanding of the Overlay will often lead to the answer. For purpose of illustration, start with the three day Overlay in figure 8. The market is in balance: the single distribution is centered at 110200. The three TPO rule identifies the limits as 110700 and 109400. (Note the TPO's at two prices, 10900 - 108900 is too short to qualify as a distribution.) The trader/analyst starts the next day, Nov 9, with a market in balance, one that will leave balance at price above 110700 or price below 109400.



A Balance: 3 DAY OVERLAY 

META-PROFILE OVERLAY*
DEC 00 DJIA (CBOT)  DAY      
11 06 00 TO 11 08 00

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
110800  1   6     6               1 X
110700  2   68    68              4 XXXX  <== Upper Limit
110600  2   68    68              5 XXXXX
110500  3   68    678            14 XXXXXXXXXXXXXX
110400  3   68    678            21 XXXXXXXXXXXXXXXXXXXXX
110300  3   68    678            27 XXXXXXXXXXXXXXXXXXXXXXXXXXX
110200  3   68    678            29 XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
110100  3   68    678            23 XXXXXXXXXXXXXXXXXXXXXXX
110000  3   68    678            20 XXXXXXXXXXXXXXXXXXXX
109900  3   68    678            13 XXXXXXXXXXXXX
109800  3   68    678             7 XXXXXXX
109700  2   68    68              4 XXXX
109600  2   68    68              3 XXX
109500  2   68    68              3 XXX
109400  2   68    68              3 XXX   <== Lower Limit and Close Nov 8
109300  2   68    68              2 XX
109200  2   68    68              2 XX
109100  1   6     6               1 X
109000  1   6     6               3 XXX
108900  1   6     6               4 XXXX
108800  1   6     6               2 XX
108700  1   6     6               1 X

Figure 8. Three day Overlay for DJ Index, Nov 6, 7, 8.
This figure is similar to figures 6 and 7, with 'TPO VOL OVERLAY'
replacing the column  '1=NEAR, 2=NEXT BK,...' and 'ROT PROFILE'
indicating days (6 = Nov 6, 7 = Nov 7 and 8 = Nov 8).
This three day Overlay uses some of the same data as found in Figures 4 - 7.
Shown is a three day balance (single distribution).

Overlay Demand Curve is a trademark of CISCO Futures 1987.
Some prices are omitted to condense the display.

The market of Nov 9 opens at 109450, within the previous three day balance. This is the high of the day. Price quickly falls below 109400. This is an alert for a downside breakout. A four day Overlay, Nov 6 through 9 is shown in figure 9.


Breakout from a 3 Day Balance: 

META-PROFILE OVERLAY*
DEC 00 DJIA (CBOT)  DAY      
11 06 00 TO 11 09 00

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
110800  1   6     6               1 X
110700  2   6     68              4 XXXX
110600  2   6     68              5 XXXXX
110500  3   6     678            14 XXXXXXXXXXXXXX
110400  3   6     678            21 XXXXXXXXXXXXXXXXXXXXX
110300  3   6     678            27 XXXXXXXXXXXXXXXXXXXXXXXXXXX
110200  3   6     678            29 XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
110100  3   6     678            23 XXXXXXXXXXXXXXXXXXXXXXX
110000  3   6     678            20 XXXXXXXXXXXXXXXXXXXX
109900  3   6     678            13 XXXXXXXXXXXXX
109800  3   6     678             7 XXXXXXX
109700  2   6     68              4 XXXX
109600  2   6     68              3 XXX
109500  2   6     68              3 XXX
109400  3   69    689             5 XXXXX <== Lower Balance Limit for Nov 8
109300  3   69    689             5 XXXXX       Breakout within 10 minutes of open
109200  3   69    689             5 XXXXX
109100  2   69    69              7 XXXXXXX
109000  2   69    69             11 XXXXXXXXXXX
108900  2   69    69             14 XXXXXXXXXXXXXX
108800  2   69    69             12 XXXXXXXXXXXX
108700  2   69    69             11 XXXXXXXXXXX
108600  1    9    9               8 XXXXXXXX    <== Close Nov 9
108500  1    9    9               9 XXXXXXXXX
108400  1    9    9               7 XXXXXXX
108300  1    9    9               6 XXXXXX
108200  1    9    9               4 XXXX
108100  1    9    9               4 XXXX
108000  1    9    9               3 XXX
107900  1    9    9               3 XXX
107800  1    9    9               2 XX
107700  1    9    9               3 XXX
107600  1    9    9               3 XXX
107500  1    9    9               3 XXX
107400  1    9    9               2 XX
107300  1    9    9               2 XX
107200  1    9    9               2 XX
107100  1    9    9               2 XX
107000  1    9    9               2 XX
106900  1    9    9               2 XX
106800  1    9    9               2 XX
106700  1    9    9               2 XX
106600  1    9    9               1 X
106500  1    9    9               1 X
 
Figure 9. Four day Overlay for DJ Index, Nov 6, 7, 8, 9.
'ROT PROFILE' indicates days (6 = Nov 6, 7 = Nov 7, 8 = Nov 8 and 9 = Nov 9).
This three day Overlay uses some of the same data as found in Figures 4 - 7.
The three day balance (single distribution) of figure 8 is augmented with the
data of Nov 9, illustrating a breakout. The single distribution of figure 8
is centered at 110200. That distribution still shows, but another has been
added, centered at 108900. The breakout below 109400 gave an alert that the
market was transitioning from balance to directional. The formation of the
second, lower distribution confirmed the change in market condition.

Overlay Demand Curve is a trademark of CISCO Futures 1987.
Some prices are omitted to condense the display.

Analysis of the Breakout Day, Nov 9
Referring to figure 9, the breakout at 109350 (first price below 109400 on this graphic) was followed by much more downside activity. By the end of the day the market is clearly in a down trend: there are now two distributions, the old one centered at 110200 and a new one centered at 108900. The transition from balance to trend occurred in minutes, after the open, as a Meta-Profile would show. The uncertainty now is just how long will the market remain in the directional phase? Of course, no one knows, but tracking the Overlay will define the congestion, as it enters the market. Of course, from figure 5, the down move continued to at least Nov 13.

Analysis of the End-of-Trend Overlay, Nov 13 - 16
In the ROT PROFILE column of figure 10, the first entry, day 5, is the trading for Nov 13. From figure 5, price on Nov 13 ended near the highs. The Overlay confirms that the trend bottomed on Nov 13. Price ran up on Nov 14 (day 6), and on Nov 15 (day 7), price opened at 107250, ran up to 108500 and closed back down at 107600. The market has started to balance. By Nov 16 there is a well defined balance. The earlier trading on Nov 13 and the first part of Nov 14 now refers to an 'old' distribution, one that was directional up. For the limits of the new balance the upper one at 108300 is clear, the lower limit can be estimated at around 106500, although it could be more accurately determined with a shorter time frame Overlay.


META-PROFILE OVERLAY 
DEC 00 DJIA (CBOT)  DAY      
11 13 00 TO 11 16 00

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
108500  1         7               1 X
108400  1         7               1 X
108300  1         7               4 XXXX  <== Upper Limit
108200  1         7               5 XXXXX
108100  2         67              5 XXXXX
108000  3    8    678             7 XXXXXXX
107900  3    8    678             8 XXXXXXXX
107800  3    8    678             9 XXXXXXXXX
107700  3    8    678            14 XXXXXXXXXXXXXX
107600  3    8    678            17 XXXXXXXXXXXXXXXXX
107500  3    8    678            15 XXXXXXXXXXXXXXX
107400  3    8    678            18 XXXXXXXXXXXXXXXXXX
107300  3    8    678            23 XXXXXXXXXXXXXXXXXXXXXXX
107200  3    8    678            25 XXXXXXXXXXXXXXXXXXXXXXXXX
107100  3    8    678            20 XXXXXXXXXXXXXXXXXXXX
107000  3    8    678            16 XXXXXXXXXXXXXXXX
106900  3    8    678            15 XXXXXXXXXXXXXXX
106800  3    8    678            12 XXXXXXXXXXXX
106700  2    8    68              9 XXXXXXXXX
106600  1         6               7 XXXXXXX
106500  1         6               5 XXXXX  <== Lower Limit (est)
106400  2   5     56              6 XXXXXX
106300  2   5     56              5 XXXXX
106200  2   5     56              5 XXXXX
106100  2   5     56              5 XXXXX
106000  1   5     5               4 XXXX
105900  1   5     5               5 XXXXX
105800  1   5     5               6 XXXXXX
105700  1   5     5               6 XXXXXX
105600  1   5     5               5 XXXXX
105500  1   5     5               5 XXXXX
105400  1   5     5               7 XXXXXXX
105300  1   5     5               8 XXXXXXXX
105200  1   5     5               9 XXXXXXXXX
105100  1   5     5               7 XXXXXXX
105000  1   5     5               6 XXXXXX
104900  1   5     5               5 XXXXX
104800  1   5     5               4 XXXX
104700  1   5     5               4 XXXX
104600  1   5     5               4 XXXX
104500  1   5     5               4 XXXX
104400  1   5     5               4 XXXX
104300  1   5     5               3 XXX
104200  1   5     5               3 XXX
104100  1   5     5               1 X
 
Figure 10. Four day Overlay for DJ Index, Nov 13 , 14, 15, 16.
 
Overlay Demand Curve is a trademark of CISCO Futures 1987.
Some prices are omitted to condense the display.

The Overlay Demand Curve is the third discovery establishing auction market value theory as a viable discipline. It is now possible to find value in the short time frame of a day or less and longer time frames of many days. An Overlay's ability to find market condition permits a deeper understanding of the structure of markets, such as the typical number of days in balances and the typical number in trends. A side benefit is that it is now often possible to evaluate methodologies used in trading, throwing light on practical questions such as the general viability of some well known trading methods.