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The Market Unit
Foreword
By Donald L. Jones, March 17, 2005
Copyright 2005
Auction market analysis is based on value. Day value from Market Profile/
Meta-Profile and
longer term value from Overlay Demand Curve. (Market Profile is from a
CBOT Liquidity Data Bank, Meta-Profile is from tick data.)
Constant value defines a market
in balance. Changing value (trend) starts from balance, runs directionally,
stops changing and ultimately
ends back in a balance. The process of balance-to-trend and back to balance
is a Market Unit. The elapsed time of a market unit varies from unit to unit.
A series of market units
forms a new, deeply revealing sort of market data. The length of time and
the price range of the balance and
the amplitude, range and time
of the trend offers traders quantitative knowledge of their market.
We begin by a simple examination of the structure of markets in general.
Markets move
in waves, from high to low and low to high etc., continuously. The time
to complete a wave varies from wave to wave. One cycle might be 10
days and the next can be 30 days in a completely irregular manner. Likewise,
the amplitude from top to bottom of a wave varies widely. For instance from
April 7 to September 2003 for the SP there were 5 complete waves. The number of
days per wave varied from 13 days to 28 days. An example of wave dates and
their amplitude illustrates the irregularity.
Wave
High Low Period H-L Amplitude
Apr 7 900.00
Apr 11 865.50 28 34.5
May 15 945.30
May 20 913.50 18 31.8
Jun 17 1015.60
Jul 1 960.50 18 55.1
Jul 14 1014.30
Jul 21 973.60 13 40.7
Jul 31 1003.70
Aug 6 958.50 26 45.2
Sep 9 1034.60
In this short run (under six months), wave periods varied by over a factor
of two. In the earlier
months of 2003 the variation in period was a factor of three. Such variations
are found in all markets. We conclude that markets show little regularity.
A consequence is that 'smoothing', as with a moving average, is on a slippery
slope indeed. These results play a role in the general ineffectiveness
of technical analysis based on moving averages and oscillators. However, we
are primarily interested in the support lent to the market unit studies by
this look at market variability. Market unit analyses flesh out our bare-bones
study of market waves.
A market unit of an auction market is defined by the markets
progression:
from the start of a balance, to the end of the balance (breakout), through
a trend phase and then back
to the start of the next balance. Balance, or short term equilibrium, is a
non-directional, volatility dominated time period. Breakout from the balance
initiates a directional, or trend, phase. As the trend decays, a new
balance initiates the next unit. The market over time is merely the conjoining
of the separate market units as they evolve. Balances and trends are market
defined and hence market units have neither a standard time period nor a
standard amplitude for their trends. Market condition (balancing or trending)
is a local descriptor of the current state of the market and defies
generalization
(e.g. the previous market unit was ten days, so this one will be around ten
days). Knowing where you are within a market unit is imperative to the trader.
Inside the balance you are dealing with non-directional volatility. In the
trend, market movement is dominated by directionality, with volatility secondary.
The market unit is the fundamental element of market structure. It is the primary
element of information for market understanding. As a market unit develops, the
first phase, balance, arises out of the dying trend.
Then, breakout from balance signals a potential change in market condition from balance to
directional. The directional phase includes any trending and
the prelude, consolidation, to end of trend. As the market returns to non-
directionality, the balance phase of the next market unit begins.
Market units break a market into discrete pieces. Each piece follows it's
own scenario; spending time in balance and then being driven in the directional
phase.
The Balance Phase
A balance may may be completed in a few days or may continue for many
days or weeks. Over time, the balance range (support/resistance) may change
slowly as the market responds to low level changing demand. A surge in demand
will cause price to exceed the balance limits, causing a breakout.
The Directional Phase
Increasing demand drives the market directionally, e.g. in a trend. During
the directional phase support/resistance is poorly defined.
As the buying/selling pressure decays the trend loses steam and price movement
slows. This effect is measurable as an increase in congestion. Directional
markets often pass through several such slowings (pauses) until the final
congestion grows into a new balance.
Discovering a Market Unit
Analysts typically use price in their work. In most cases this is
a mistake. Price has a large volatility component. Value is a better choice.
The early work of Steidlmayer [1] identified the "Market Profile" as a way to
find value for one day's trading. Market Profile value is found from cleared
volume, with the center of value located at the highest volume. Meta-Profiles
are built from half-hour range bars to find frequency of occurrence at each
price. In the Meta-Profile, the center of value is at the price with the
most frequent trading. Profiles decode the market feedback into value.
In this study, Meta-Profiles are the source of all values used. The
Meta-Profile for the DJIA future for April 1, 2004 in Figure 1 shows the
day's half-hour bars on the left coalesced
into the profile on the right. The profile displays the aggregated trading
by price. As typical of all markets, there is little trading at the day's
extreme top and bottom prices and quite a lot
in the middle. Steidlmayer named the central seventy percent of trading
the "value area". Value is the winner of the the price popularity contest.
Longer term value is found from the Overlay Demand Curve (ODC) [2]. The ODC
is a linear aggregation of Meta-Profiles.
Market/Meta Profiles Background
Overlay Demand Curve Background
Figure 2A is an ODC of the four days
March 29 through April 1 (day symbols 6, 7, 8, 9). Trading is concentrated
between 103800 and
102800; labeled Upper Limit and Lower Limit respectively. The single
quasi-rectangular shaped distribution indicates the DJIA is balancing between
upper and lower limits. Overlays are the source of the information
that defines market units. In Figure 2A you see the balance that will
ultimately move into a breakout, which with the ensuing trend, completes
a market unit.
A five day Overlay, Figure 2B, shows the vestiges of an earlier balance
that ended on March 26 (prices 102400 to 101700, day symbol 5). Lastly,
Figure 2C,
a nine day Overlay, displays an earlier balance between 101000 and 99900
(March 22 through 25, day symbols 1, 2, 3, 4). Call this balance 1. An
upside breakout on
March 25 (around 10:25 am) continued into March 26 (day symbols 4, 5, 6).
Call this trend 1; it ended about 10:50 am March 26. That was the beginning
of the new four day balance (although the fact that a new balance was
developing would not
be completely determined for a couple of days). You now have a mapping of
a market unit that began with a balance (99900 to 101000) broke out into
a trend (101100 to 102800) and ended with the beginning of the next balance.
The completed market unit 3/22 through 3/31 and the partial next unit is
shown in the symbol/date table:
Symbol 1 2 3 4 5 6 7 8 9
Date 3/22 3/23 3/24 3/25 3/26 3/31 3/29 3/30 4/01
Bal1..............Bal1
Tnd1........Tnd1
Bal2..............Bal2
Tnd2......
The beginning balance (symbols 1, 2, 3 and 4) covered the price range
101000 to 99900, denoted on the symbol/date table as Bal1. The trend phase,
Tnd1, starting on March 24 continued into March 31 (symbols 4, 5 and 6).
This completes the unit. In all it lasted six days and the balance to
balance price change (amplitude) is 102700 - 101100 or 1600. Converted to
dollars, the amplitude is $1,600, a significant price change.
The new balance (Bal2, on day 6) signals the start of the next market unit.
Balances and the units associated with them have a somewhat fractalish
nature. A longer timeframe, say twenty days, can include shorter units
and at times the shorter ones can lose their identity through mixing.
To completely define a market unit one needs Overlays with different time
bases. Experience
with futures shows a good set for market surveillance is 5, 10, 15 and
20 days. One can use a time base as large as desired, but the annual
length used in much of equities analysis is sorely lacking in detail.
The example below follows the behavior of the Dow Index future through the
period March 22, 2004 through April 1, 2004, a period of nine trading
days, culminating in Figure 2c. In this nine days the market created a four
day balance (March 22 - 25),
a three day directional move (March 25 - 29) and then a four day balance
(March 29 - April 1). This unusually compact market unit was selected because
of it's compactness. It displays the initial balance (March 22 - 25), how
that balance evolved into a directional move, including a pause in the
middle and then the later balance. An examination of the second balance
would show it initially began as a pause (March 29 - 30), only evolving
into a clear balance by April 1.
Figure 1. Short Timeframe Value from the Meta-Profile
Market value is described by price but it is not itself a price. For instance,
think of a trading day, say April 1, 2004 for the Dow Jones Index. Split
the day into half hour time periods from the open at 7:20 am
to the close at 3:15 pm. Give each time block an identifier: y for 7:20 to
7:30, z for 7:30 to 8:00, A for 8:00 to 8:30, B for 8:30 to 9:00 and so on
alphabetically for the rest of the day, where N identifies trading from 3:00
to 3:15 pm. These letters are called TPOs (time-price-opportunity, or that-
price-occurred). TPOs show time - trade matches. As you will see, value
is price-over-time and TPOs provide the measure.
Meta-Profile for the Dow Index on April 1, 2004.
META-PROFILE REPORT FOR 04 01 04
COMMODITY -- DJIA (CBOT) DAY JUN 04 LENGTH OF FIRST PERIOD = 10 MINS
Half - Hour Bars = Segmented Auction Market Profile
TPOs
103950 D 103950 D
103900 D E 103900 DE
103850 D E 103850 DE
103800 D E 103800 DE
103750 D E F K 103750 DEFK
103700 D F J |K |L P 103700 DFJKLP
103650 C | |G | | |J |K |L | | |P 103650 CGJKLP <== VAu
103600 C | | |G |H | |J |K |L |M | |P 103600 CGHJKLMP
103550 z C | | | | |H |I | |K |L |M >N >P 103550 zCHIKLMNP
103500 z |C | | | | |H |I | | |L |M |N |P 103500 zCHILMNP
103450 |z |A | |C | | | | |H |I | | | |M |N | 103450 zACHIMN
103400 |z |A |B |C | | | | |H | | | | |M |N | 103400 zABCHMN
103350 |y |z |A |B |C | | | | | | | | | |M |N | 103350 yzABCMN <== VAl
103300 A |B |C | | | | | | | N 103300 ABCN
103250 B C | | | | | | 103250 BC
103200 B C | | | 103200 BC
VALUE AREA: Central 70% of TPOs
UPPER 103670
LOWER 103320
Fig 1. Half-Hour Bars (left) and Meta-Profile (right),
June 04 delivery, Trading on April 1, 2004. Price compression times 5.
The vertical bars on the left labeled z, y, A, B,... identify the
trading range for each time period from 7:20 am to 3:15 pm.
The vertical dashed lines accompanying
the half-hour bars are a running measure of the developing value area.
Meta-Profile, letters on the right (TPOs), give price and time of day that
price was traded (example: 103250 traded in the 8:30 to 9:00 am period
(B) and also in C period, 9:00 to 9:30.
Features of Fig 1. (From the Meta-Profile)
1) Price 103950 traded in only one period, the high of the day
2) Prices 103900 to 103800 and 103250 to 103200 traded in only two periods
3) The most popular price, 103550 was visited in nine of the day's 17 periods
4) Seventy percent of the TPOs, the value area, lie between 103670 and 103320.
5) The shape of the TPO distribution is a single bell shaped curve.
Explanation of Figure 1. The Features
1) Little trading at the top four prices shows the market rejected these prices
2) Little trading at the bottom two prices shows the market rejected these prices
3) 103550 won the day's popularity contest
4) The bulk of the trading (70%) lies between 103670 and 103320 which is
named the "Value Area".
5) The single distribution (bell shape) shows balance.
Conclusion: You found the price range the market selected on April 1
for its best estimate of value. Value is not a price, but rather the
price range 103670 to 103320.
Overlay Demand Curves: Collective Value for Multiple Days,
Figures 2A, 2B, 2C
The Meta-Profile value area locates market determined value for a
single day. Longer timeframes are handled by the Overlay Demand Curve,
a linear summing of the individual profiles. The Overlay determines
'market condition', visually identifying balances, trends and other
more complicated states of the market. The thesis is similar to that
applied to profiles: a single distribution indicates balance, a run
shows a trend and distributions that are neither balance or trend are
defined and 'other'. Market distributions are continually evolving, following
the general system of balance to trend to balance. More correctly there are
five steps: balance to transition to trend to transition to balance.
Starting from balance the next step is a breakout into a transition.
The transition may continue into a trend or move back into balance. A
third possibility is to move into a choppy phase where neither balance
or trend exist. This is one of the 'other' conditions where the market may
zig and zag apparently at random.
In the Overlay discussion that follows we examine market condition over
the eleven day time period March 22 to April 1, 2004 for the Dow Jones
index, June Delivery. In the displays below, each day is represented
by a symbol in the ROT PROFILE column, which stands for a date:
Symbol 1 2 3 4 5 6 7 8 9
Date 3/22 3/23 3/24 3/25 3/26 3/31 3/29 3/30 4/01
where ROT PROFILE identifies those dates each price traded. A price may
trade in several periods of a day, e.g. 103750 traded only on day 9 (4/01)
with that price occurring in three different half-hour time periods.
A Four Day Balance
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
JUN 04 DJIA (CBOT) DAY
03 29 04 TO 04 01 04
PRICE DYS L/F ROT PROFILE * TPOS TPO VOL OVERLAY *
103900 1 9 9 2 XX
103800 2 9 89 4 XXXX <== Upper Limit
103700 2 9 89 9 XXXXXXXXX
103600 3 9 789 15 XXXXXXXXXXXXXXX
103500 3 9 789 15 XXXXXXXXXXXXXXX
103400 3 9 789 15 XXXXXXXXXXXXXXX
103300 3 9 789 17 XXXXXXXXXXXXXXXXX
103200 4 69 6789 16 XXXXXXXXXXXXXXXX
103100 3 6 678 21 XXXXXXXXXXXXXXXXXXXXX
103000 3 6 678 17 XXXXXXXXXXXXXXXXX
102900 3 6 678 8 XXXXXXXX
102800 2 6 67 5 XXXXX <== Lower Limit
102700 1 6 6 1 X
102600 1 6 6 1 X
102500 1 6 6 1 X
102400 1 6 6 3 XXX
Figure 2A. Dow Jones Index, June 2004 delivery, March 29 to April 1. Price compressed times 10.
Legend:
PRICE: Trading price
DYS: Number of days in which that price traded
L/F: L = Last symbol (earliest day, 6); F = First symbol (latest day, 9)
ROT PROFILE: Day symbols for each price (6 for Mar 29, 7 for Mar 30,...)
TPOS: Number of total half-hour periods traded
TPO VOL OVERLAY: TPOS extended with X's for a visual of trading activity
The DYS and ROT PROFILE columns are two ways to estimate general trading density.
TPO VOL OVERLAY is a pictorial of the trading density at price.
The four day Overlay of Figure 2A shows a single distribution (where the
minimum distribution has at least three TPOs with four contiguous prices). The
upper and lower limits of the distribution are 10385 and 102800. Outside
those limits are vestiges of previous distributions or just noise.
Market perceived value for the four day period is no particular price, rather
it is a 'value region' between 10385 and 102800. This longer term value may
be contrasted with the 'value area' of April 1 of Figure 1: 103670 to 103220.
Now you have a longer timeframe value with a local value nested inside.
Market condition is a function of the timeframe. If the market is in a long
timeframe balance you might find not only, say a month balance, but internediate
periods (4 day, 7 day, 15 day, etc.) all in balance as well. We define this
as an 'equilibrium' situation. A change in price level is often manifested
by first, a shorter term movement (a 4 or 5 day breakout), then a 10 day breakout,
and so forth. Likewise a trend coming to an end will be seen first as a
short term balance, then longer balances, until the longest timeframe is balanced.
An Out of Balance Market Coming into Balance
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
JUN 04 DJIA (CBOT) DAY
03 26 04 TO 04 01 04
PRICE DYS L/F ROT PROFILE * TPOS TPO VOL OVERLAY *
103900 1 9 9 2 XX
103800 2 9 89 4 XXXX <== Upper Limit |
103700 2 9 89 9 XXXXXXXXX |
103600 3 9 789 15 XXXXXXXXXXXXXXX |
103500 3 9 789 15 XXXXXXXXXXXXXXX |
103400 3 9 789 15 XXXXXXXXXXXXXXX Balance
103300 3 9 789 17 XXXXXXXXXXXXXXXXX |
103200 4 9 6789 16 XXXXXXXXXXXXXXXX |
103100 3 678 21 XXXXXXXXXXXXXXXXXXXXX |
103000 3 678 17 XXXXXXXXXXXXXXXXX |
102900 3 678 8 XXXXXXXX |
102800 2 67 5 XXXXX <== Lower Limit |
102700 1 6 1 X
102600 1 6 1 X
102500 1 6 1 X
102400 2 5 56 4 XXXX <== Upper Limit (previous)
102300 1 5 5 4 XXXX
102200 1 5 5 6 XXXXXX
102100 1 5 5 6 XXXXXX
102000 1 5 5 4 XXXX
101900 1 5 5 5 XXXXX
101800 1 5 5 7 XXXXXXX
101700 1 5 5 3 XXX <== Lower Limit (previous)
101600 1 5 5 1 X
Figure 2B. Dow Jones Index, June 2004 delivery, March 26 to April 1.
Price compressed times 10.
Figure 2B. illustrates a double distibution day. The later, upper distribution,
is the one of Figure 2A. The lower distribution is obsolete, having been
superceded. You would suspect that there was an earlier distribution that
defined a lower value, but it is not possible to tell from a single day.
Stepping from One Value to Another
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
JUN 04 DJIA (CBOT) DAY
03 22 04 TO 04 01 04
PRICE DYS L/F ROT PROFILE * TPOS TPO VOL OVERLAY *
103900 1 9 9 2 XX
103800 2 9 89 4 XXXX <== Upper Limit |
103700 2 9 89 9 XXXXXXXXX |
103600 3 9 789 15 XXXXXXXXXXXXXXX |
103500 3 9 789 15 XXXXXXXXXXXXXXX |
103400 3 9 789 15 XXXXXXXXXXXXXXX Balance 2
103300 3 9 789 17 XXXXXXXXXXXXXXXXX |
103200 4 9 6789 16 XXXXXXXXXXXXXXXX |
103100 3 678 21 XXXXXXXXXXXXXXXXXXXXX |
103000 3 678 17 XXXXXXXXXXXXXXXXX |
102900 3 678 8 XXXXXXXX |
102800 2 67 5 XXXXX <== Lower Limit |
102700 1 6 1 X |
102600 1 6 1 X |
102500 1 6 1 X |
102400 2 56 4 XXXX | |
102300 1 5 4 XXXX | |
102200 1 5 6 XXXXXX | |
102100 1 5 6 XXXXXX | Trend 1
102000 2 45 5 XXXXX | |
101900 2 45 8 XXXXXXXX | |
101800 2 45 10 XXXXXXXXXX Pause |
101700 2 45 5 XXXXX | |
101600 2 45 4 XXXX | |
101500 1 4 3 XXX | |
101400 1 4 1 X |
101300 1 4 2 XX |
101200 1 4 2 XX |
101100 1 4 1 X |
101000 3 1 124 4 XXXX <== Upper Limit (previous) |
100900 3 1 124 17 XXXXXXXXXXXXXXXXX |
100800 4 1 1234 20 XXXXXXXXXXXXXXXXXXXX |
100700 4 1 1234 19 XXXXXXXXXXXXXXXXXXX |
100600 3 1 123 15 XXXXXXXXXXXXXXX |
100500 3 1 123 21 XXXXXXXXXXXXXXXXXXXXX |
100400 3 1 123 25 XXXXXXXXXXXXXXXXXXXXXXXXX Balance 1
100300 3 1 123 20 XXXXXXXXXXXXXXXXXXXX |
100200 3 1 123 15 XXXXXXXXXXXXXXX |
100100 2 1 13 8 XXXXXXXX |
100000 2 1 13 7 XXXXXXX |
99900 2 1 13 3 XXX <== Lower Limit (previous) |
99800 1 3 1 X
Figure 2C. Dow Jones Index, June 2004 delivery, March 22 to April 1.
Price compressed times 10.
A longer view of the DJ index behavior through April 1 clearly shows a
stepped equilibrium.
The three days March 22 - 24 (symbols 1, 2, 3) and part of March 25 describes
a nicely balanced market with a value region 101000 to 99900. On March 25
(symbol 4), around 10:25 am, price broke above 101000. The breakout initiated
a trend that moved quickly up to 102000. The next two days, March 26 and 27
(symbols 5 and 6), the trend continued up to as high as 103250. In the middle
of the trend, around 101800, upward movement stopped for as long as ten half
hour periods. Such interruptions of a trend, called pauses, are a normal part of
many trends. The Overlay display format makes pauses clearly evident.
This trend, from breakout
to trend end, 2250 points, is a 2.2 percent move, or $2,250 for the DJ future.
The ensuing four day period (symbols 6, 7, 8, 9) described the new balance
value region 102800
to 103800. The previous balance at 99900 to 101000 is about 3000 points
lower.
This example illustrates the clarity and definition of the balance regions
as well as the intensity of the intervening trend. Four or five day balance
breakouts are often the precursors, the early alerts for major market
movements. However,large market movements are less frequent.
Longer
balances of ten or twenty days are more stable, of course. However, longer
timeframe
balances are harder to achieve. In the year 2002 (250 trading days) we
found 139 five day balances, 169 ten day, 120 fifteen day and
116 twenty day balances. There were 77 days of true equilibrium where
all four timeframes were balanced. The longest continuous run with all four
balances maintained was only nine days.
Variation Over Time
Most technical analysis methods assume regularity, but markets are anything
but regular. For the Dow Index in the first quarter of 2004 the market created five units.
The shortest was four days, a two day balance followed by a two day directional period. The
longest was 20 days, fifteen in balance, five directional. The five units and their dates
are listed below (B is balance, D is directional). Within the period of Jan 6 to Mar 16
encompassed by the March future, price started at 105070 and went from a high of 107500 to
a low of 101150, closing at 10185 on Mar 16.
The variability of market units presented in this table is not unusual. For all of 2003 the
average balance period was 7.4 days, with individual balance periods ranging from 2 to 15 days.
In the same period the average directional period of 5.8 days came from periods ranging from
2 to thirteen days.
A trader finds opportunity in the directional markets. These begin with a movement out of balance
and end with the start of a new balance. Predicting when a breakout will begin starts with an
understanding of the balance itself, from the Overlay Demand Curve.
Overlay Demand Curve Background
Locating the end of the directional phase of a market requires the identification
of a phase change, the change of the directional phase into the congestion that
is the beginning of a new balance. A moving, directional market does so under
the impetus of demand. The best tool for reading demand change is the Market
Profile, described by J. Peter Steidlmayer in 1985 (1). Market Profile uses
volume from the CBOT LDB data bank. The LDB depends on the clearing process
and lags the market within the day. Most traders use the Meta_Profile,
developed by Jones in 1987 (3). Meta-Profile comes from a tick database and
is real time.
Market Profiles Background
A Brief Table of Dow Index Market Units, First Quarter 2004
0106 0107 0108 0109 0112 0127 0128 0203 0204 0206 0209 0212 0213 0305 0308 0312 0316 0319 0322 0408
B = 2 D = 2 B = 11 D = 5 B = 3 D = 4 B = 15 D = 5 B = 4 D = 13
or
Balance: 2 days 0106-0107
Directional: 2 days 0108-0109 Market Unit = 4 days
Balance: 11 days 0112-0127
Directional: 5 days 0128-0203 Market Unit = 16 days
Balance: 3 days 0204-0206
Directional: 4 days 0209-0212 Market Unit = 7 days
Balance: 15 days 0213-0305
Directional: 5 days 0308-0312 Market Unit = 20 days
Balance: 4 days 0316-0319
Directional: 13 days 0322-0408 Market Unit = 17 days
One Year of Market Units for DJ, Basis 5, 10 and 15 day Overlays
The time lengths of Market Units differ depending on the time scale
examined. The table below is for the Dow Index for 2004. Length of a
Market Unit is defined as the period encompassed from the beginning of
one balance to the beginning of the next.
Days in Unit 5 Day Overlay 10 Day Overlay 15 Day Overlay
Sum Sum Sum
2 1 2 2 4
3 7 21 10 30 8 24
4 9 36 13 52 10 40
5 3 15 M=> 4 20 M=> 7 35
6 2 12 6 36 3 18
7 M=> 9 63 10 70 7 49
8 7 56 1 8 0
9 3 27 5 45 4 36
10 3 30 2 20 1 10
11 3 33 3 33 1 11
12 1 12 0 0
13 1 13 0 1 13
14 0 0 0
15 1 15 3 45 0
16 1 16 0 1 16
17 0 0 1 17
18 0 0 0
19 0 1 19 0
20 0 0 1 20
21 0 0 0
22 0 0 0
23 0 0 2 46
24 0 0 1 24
25 0 0 0
26 0 0 0
27 0 0 0
28 1 28 0 0
29 0 0 1 29
Total 51 377 59 380 51 390
Ave Day/Event 7.4 6.4 7.6
M=> Median 7 dy 5 dy 5 dy
Figure 3. Market Units on three time scales for the DJ in 2004.
A market unit cannot be shorter than 2 days, one for the balance (5, 10 or 15 days) to be reported
and one day for the directional move. The very short units of 2 or three days are usually
failed breakouts. In the table column 1 is the number of days in the market unit. Column 2 is
the number of events found in 2004 for 5 day Overlays extended out for the sum of days in
each unit (7 events at 3 days is 21 total days for the 3 day unit). Similarly for the 10 and
15 day columns. At the bottom are the total market units for the year (51 for 5 day Overlays)
and the average number of days per unit (7.4 for 5 day Overlays). The
Figure M=> locates
the median value.
While it is possible to find averages and medians for the market units, the spread is large.
For 5 day Overlays, there is approximately the same probablity of occurrence for 3, 4, 5, 6,
7 and 8 days. This confirms the statement in the article Market Waves are
NOT Cycles
Market Waves are NOT Cycles
concerning the use of moving averages in market analysis. For instance, the
variation in market unit lengths from unit to unit, Feb. 23 to May 16 were 8,
11, 28, 7, 15, 16, and 7 days respectively. It would be hard to make sense
of any sort of average for this time period. A long run of 15 or 28 days offers
a great deal of opportunity for the day trader and swing trader both. For instance
the 28 day run of March 16 through April 8 saw price go from 101620 to
104290 (about $2,500).
The day trader would have maintained a generally 'long' mentality for this
period while swing traders would look to stay on the long side.
Market Units for emini SP for 2005
Each box represents a balance period as measured by the 5 day Overlay. The
height of the rectangle is the average price range of the balance period
and the width is the number of days the balance is maintained. The last
balance may have a breakout sometime within the day.
Table of Balance Periods: emini SP 2005
PD 1 2 3 4 5 6 7 8 9 10
D1 0110 0126 0207 0217 0309 0324 0420 0524 0629 0715
D2 0111 0131 0211 0221 0314 0413 0516 0622 0707 0804
#D 2 4 5 3 4 14 20 22 6 15
OP 119125 117300 120100 120125 120675 117475 115775 119625 120300 123125
CL 118400 118175 120700 120100 121200 117600 116700 112125 120275 123800
PD 11 12 13 14 15 16 17 18 19 20
D1 0810 0819 0829 0913 0926 1011 1104 1115 1129 1221
D2 0815 0823 0830 0919 0928 1101 1109 1116 1212 1222
#D 4 3 2 5 3 16 4 2 11 2
OP 123350 122075 121450 123875 122150 118925 122350 123250 125925 127000
CL 123750 122150 120850 123800 122275 120125 122375 123475 126925 127550
Table 1. Balance Periods: emini SP 2005, 5 Day Balances
The 20 periods of balance are labeled PD. D1 and D2 are the starting and ending dates
of a balance. #D is days in balance, including the breakout day if breakout occurs
inside the trading period (regular market day). OP is the point of control of the first
day of balance, CL is the point of control of the last. (Point of control is the central
price of the day from the Meta-Profile or for CBOT cleared volume, the Market Profile.)
The rectangles on Figure 4 depict the variety of times and approximate amplitudes the balance periods
can take. This is trader driven and hence is a picture of the vagaries of the collective
trader. Although the SP market was generally rising through 2005, there is no apparent
general strategy for the year. A trader with a 'long' attitude for the year (say on some
fundamental view) would find a number of periods of adversity. Arguably the best strategy
is to key off the balances, which are identified by the Overlay Demand Curve (Visual
Graphic). You can know the balance and, at the start of any day, the price that will
break out of the balance (an alert for start of a trend). This is a key signal, regardless
of one's strategy.
The lack of pattern to the changing balance blocks evidences the lack of ability to project
or predict the coming market behavior. Everyone would like to project the market successfully
for even a few hours. Unfortunately, the tenets of Auction Market Value Theory
Auction Market Value Theory
precludes
prediction. It is easy to see why. Think of a market that has just experienced a jump in
price. Each trader responds in his own way, in his own time frame. This response also
appears to all as a change in market behavior, collectively maybe up, maybe down or
maybe no change. Each of us individually cannot know know what is going to happen because
those who are effecting the change by trading are just making up their minds. Until they make up
their minds, we cannot know which way it will go. That 'time for the market to make up
its mind' is called the relaxation time, most typically in the order of 15 to 30 minutes. Steidlmayer (ref 1)
thought this 'market relaxation time' was about 30 minutes and so chose that as the time
frame for Market Profile (half-hour bars).
References
1. Markets and Market Logic, J.P. Steidlmayer & K. Koy, Porcupine, 1986
2. Overlay Detection of Long Term Market Condition, D. L. Jones, The Profile Report, Vol. 2, Oct 1988
Also, Value Based Power Trading, D.L. Jones, Probus, 1993
3. Estimating the Market Profile Value Area for Intraday Trading, D.L. Jones S&C Sep. 1987
Also, Determining the TPO Value Area, D.L. Jones Mkt Logic Sch. AI Ltr, Apr 13, 1987