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Overlay Demand Curves (tm)
By Donald L. Jones December 19, 2004
Copyright 2004


The Overlay was developed to extend the one-day range of the Meta-Profile to a longer time-frame. An Overlay is a linear aggregation of profiles. Whereas the profile finds one-day value, value area, price range, the Overlay locates value for the time period desired (e.g. 3 days, 10 days, 33 days). This is the value region price range.

Overlay's are especially valuable in recognizing 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). Since all markets cycle (balance to test to trend to test to balance), an Overlay can display the entire cycle.

For more detail, go Auction Market Theory and scroll down to 'Development of an Overlay'.
To see how the Overlay is used in the Trader Control Package, go to Swing Trader Package(TCP) .
You can find the text, Value Based Power Trading at Value Based Power Trading Text (Hard copy available from 'Order Services', $45 + p&h.)


Purpose of the Overlay Demand Curve
Auction market data (Meta-Profile, Overlay Demand Curves, Liquidity Data and BuySell Data) all support the basic need of traders: to find if a market move, a breakout, will succeed or fail. Meta-Profile is the basic building block, giving the details of the session initiating the activity. Overlays place the session within the context of the market unit (whether balancing or trending). Liquidity data adds 1) the correct volume at each price and 2) which exchange members are responsible for that volume. BuySell data further expands the Liquidity data to show the details of the volume; who is buying and how much, who is selling and how much. These four data sets, Meta-Profile, Overlay Demand Curve, Liquidity Data and BuySell Data contain the detailed information required to answer the simple questions "where does a move start, how and by whom and what are the chances this move will succeed?".

Overlays exist to find if a market move, a breakout, will succeed or fail by examining 'Market Condition'. Market condition is always one of the four types: balancing, testing for trend, trend, testing for balance. The two primary cases are balancing or rotating (congesting) and trending or moving directionally. The transition from balance to trend is often clear, i.e a breakout; the transition from trend to balance is usually much less clear, involving pauses that could move back to trend or on into balance. The end game, a move going back into congestion (long pause), requires understanding the market on both the short time frame (Meta-Profile) and longer time frames represented in Overlays (3 day, 5 day, 20 day, etc.). Overlays are routinely computed for 5, 10, 15 and 20 days. If the market is in a 13 day balance, this is seen on the 15 day graph. The octant (rough estimate of risk) is one-eighth the 13 day range, and can easily be computed by hand.

Market Profiles are for primarily short term market interpretation, that is for analyzing a session. But a session itself is an integral part of a "unit", the longer timeframe that extends from balance to imbalance to balance. Just where the Meta-Profile is within a unit is necessary to its interpretation. In the Meta-Profile data type discussion (in the Background Reading section), the question of continuation-or-not for the strong down move in the July 1998 soybeans on March 2, was resolved, in part, because the Overlay showed the move to be within a balance area.

Using the Overlay Demand Curve
The Overlay gives the condition of the market. It identifies three basic trading reference points for a balanced market:
1 - upside balance limit (resistance)
2 - risk
3 - downside balance limit (support)

A breakout from the balance is an alert for start of trend. The breakout comes from a "pulse" of new demand. The pulse is just a period of concerted activity by many traders acting independently.

In the absence of a breakout one can sell near the upper resistance or buy near the lower support price. This is called "trading rotation" or "responsive trading" and has a higher noise component than breakout trading.

In a breakout situation, the shape of the Overlay distribution graphically presents the transition to trend, the pauses and the transition back to balance. The phases of the market (balance, transition, trend, transition, balance, etc.) point the trader to different strategies, depending on the phase and where you are in your trading cycle (entry, holding, exit).

The Overlay below is for the last 5 days (Feb 23 - 27). It is an accumulation of TPO's (the X's) over the last 5 days at all traded prices.

TPO's are a measure of the trading volume. A TPO is created when at least one trade takes place in a particular 30 minute period at a particular price. Think of the market as being broken down into a series of 30 minute 'mini' days.

An overlay forms a bracket when the overlay is a bell- shaped distribution of X's with a minimum peak number of X's. Less than three X's signals the end of a distribution.

The ends of the bracket define the breakout price levels. The center of the bracket is the center of value, the center of rotation.

An excursion of price from the bracket indicates a trend has begun. This is called a 'breakout'.

Sources of Overlay Demand Curves
The Trader Control Package provides Overlays for the last 5,10,15,20 days.
Visual Graphic is a compact display of the Trader Control Package
Overlays can be ordered separately for arbitrary time periods.



Overlay continuation analysis of the Meta-Profile of the previous Meta-Profiles Data from the Background section:

The Meta-Profile discussion of the July 1998 soybeans on March 2, 1998, in the Meta-Profile data Introduction to Day trading revealed:

Initial Balance was the center of activity for most of the day. The upward probe in F period (10 to 10:30 AM) was quickly rejected. For the rest of the day the market was contained until the last period, K (1 to 1:30 PM). The probe down in K period created a 'breakout' from the day balance at 665:4 and subsequently closed at 662:0 without rejection. The profile gives the following information:
...Initial Balance 6694 - 6664
...Value 6694 - 6672
...Point of Control 6682
...Upper range extension at 6696 where public drove price up
...Price rejection at 6710 in F period (sellers spoke)
...Lower tail in K period where the public drove price down ....This is selling cash flow into the market
...A close at the bottom of the range 6624
...Movement from previous day (27 Feb: POC 6650, VA 6666 - 6634) .....Today created higher value, giving most all back late in the day

Putting this information together tells you that this market has started a trend down (late in the day at K period). The down move started at 668:0 and went to 662:0 near the close. Cash flow (single prints 665:4 to 662:0) argues for a rather strong move (within the day).

The Overlay Demand Curve helps answer the question: what is the probability of continuation of the new down trend?

Market condition at the beginning of the day, from the Overlay, can provide breakout prices (short term support and resistance); while at the end of the day the condition shows whether the market has changed or not.

What was the condition of the market at the start of trading on March 2?
The 5 day Overlay (2/23 - 2/27), below, shows a balance between 672:0 and 657:2. The Value Area for March 2 is 669:4 - 667:2. Low of the day is 662:0. All the trading on March 2 is within the balance! There was no breakout, even with the strong cash flow. Value Area for February 27 is 666:6 - 663:4, so there was a higher value for March 2. But the question concerns a possible down directional trend, so higher value early in the day is not relevant.

Overlay evidence points to the March 2 cash flow down being merely rotation within a balance. March 2 ended in a 5 day balance (672:4 - 657:4), little changed from the day before. The market at the end of March 2 is still in balance with a bottom side breakout at 657.
Based on the Overlay, the probablility of continuation of the down trend is low.

Overlay Development, Building an Overlay Demand Curve
Take a look at the 5 days of Meta-Profiles, Feb 23 - 27, 1998, and the 5 day Overlay that came from them. 
               The CISCO five day Meta-Profile* display
                       Developed from Tick Data

SOYBEANS (CBOT) DAY  JUL 98:   First date:  2 23 98   Last date:  2 27 98

        23             24             25             26             27
  6730 K                                                                     
  6724 GK                                                                    
  6720 FGJK                                                                  
  6714 FJK                                                                   
  6710 EFIJK                                                                 
  6706 EFIJK                                                                 
  6704 EFIJK                                                                 
  6700 EFK           D                                                       
  6694 DEF           D                                         F             
  6690 DE            DG                                        F             
  6684 D             DFGH                                      F             
  6680               DFGH                                      F             
  6674 D             DEFGHI                                    EF            
  6670 D             DEFHI                                     EF            
  6664 D             DEFIJ                                     EFIJ          
  6660               EFIJ                        D             EFIJK         
  6654 D             EFIJ                        D             EFHJK         
  6650               J             G             D             EFGHJK        
  6644                             FGHK          D             EFGJK         
  6640               K             FGHIK         D             EFK           
  6634               K             FGHIK         D             DEFK          
  6630                             EFIK          DE            DE            
  6624                             DEFIJK        E             DE            
  6620               K             DEIJK         E             DE            
  6614               K             DEIJK         E             DE            
  6610               K             DEJ                         DE            
  6604               K             DEJ           EJK           D             
  6600               K                           EJK                         
  6594               K                           EIJK                        
  6590               K                           EFHIJK                      
  6584                                           EFGHIK                      
  6580               K                           EFGHI                       
  6574                                           EFGH                        
  6570                                           E                           
  6564                                           E                           


Examining the five profiles you might think the market was trending down
from Feb 23 to 26, turning up on Feb 27. In a sense you would be right,
looking day to day. But the question is, what is the environment prior
to the next day, Mar 2? After all Feb 23 through 27 is history, the coming
trading day, Mar 2 is what is important.

Looking at the composite of the five days, the Overlay Demand Curve, gives
a different picture. In the Overlay 1 = Feb 27, 2 = Feb 26 and so on.


FIVE DAY OVERLAY DEMAND CURVE

** ALL TDG PERIODS INCLUDED FOR VOLUME CONSISTENCY **

 VOL DETAIL  VOL   HITS  1=NEAR, 2=NEXT BK,...
     6730          2   1 5
     6724          5   2 55
     6720          7   4 5555
     6714          4   3 555
     6710          6   5 55555
     6704         10   5 55555
     6700         10   4 4555
     6694         15   5 14555
     6690          7   5 14455
     6684          9   6 144445
     6680         10   5 14444
     6674         16   9 114444445
     6670         18   8 11444445
     6664         22  10 1111444445
     6660         19  10 1111124444
     6654         21  11 11111244445
     6650         16   9 111111234
     6644         16  10 1111123333
     6640         22  10 1112333334  <== Close Feb 27
     6634         19  11 11112333334
     6630         16   8 11223333
     6624         18   9 112333333
     6620         20   9 112333334
     6614         17   9 112333334
     6610         17   6 113334
     6604         12   8 12223334
     6600         14   4 2224
     6594         14   5 22224
     6590         18   7 2222224
     6584         16   6 222222
     6580         16   6 222224
     6574          5   4 2222
     6570          1   1 2
     6564          1   1 2
 

The 5 day Overlay shows a rather nice balance! The rotational movement
within the week integrates into a short term equilibrium. Now you can 
look for an upside breakout above 6720 and downside below 6574. 

Normally day numbers do not appear on Overlays, first for convience
(day 10 and higher would cause graphing trouble), but more importantly
you want the integrated picture of market action. A typical Overlay
is shown below, with X's for TPOs.


TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
JUL 98 SOYBEANS (CBOT) DAY   
02 23 98 TO 02 27 98

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
  6730  1   4     4               1 X
  6724  1   4     4               2 XX
  6720  1   4     4               4 XXXX
  6714  1   4     4               3 XXX
  6710  1   4     4               5 XXXXX
  6704  1   4     4               5 XXXXX
  6700  2   4     45              4 XXXX
  6694  3   48    458             5 XXXXX
  6690  3   48    458             5 XXXXX
  6684  3   48    458             6 XXXXXX
  6680  2   48    58              5 XXXXX
  6674  3   48    458             9 XXXXXXXXX
  6670  3   48    458             8 XXXXXXXX
  6664  3   48    458            10 XXXXXXXXXX
  6660  3   48    578            10 XXXXXXXXXX
  6654  4   48    4578           11 XXXXXXXXXXX
  6650  4    8    5678            9 XXXXXXXXX
  6644  3    8    678            10 XXXXXXXXXX
  6640  4    8    5678           10 XXXXXXXXXX
  6634  4    8    5678           11 XXXXXXXXXXX
  6630  3    8    678             8 XXXXXXXX
  6624  3    8    678             9 XXXXXXXXX
  6620  4    8    5678            9 XXXXXXXXX
  6614  4    8    5678            9 XXXXXXXXX
  6610  3    8    568             6 XXXXXX
  6604  4    8    5678            8 XXXXXXXX
  6600  2         57              4 XXXX
  6594  2         57              5 XXXXX
  6590  2         57              7 XXXXXXX
  6584  1         7               6 XXXXXX
  6580  2         57              6 XXXXXX
  6574  1         7               4 XXXX
  6570  1         7               1 X
  6564  1         7               1 X
 
 
TPO CONTROL PRICE (HPTP)      6654
AVERAGE TPO PER TIC          6.353



Example of Overlay Breakout, Trend and Pause
   (Overlays compressed for display purposes) 
Overlay #1  A Balanced Market: A Single Distribution                   
                                    
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
MAR 03 S&P 500 (CME-IOM)     
01 09 03 TO 01 15 03

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
 93500  1         5               1 X
 93400  1         5               2 XX
 93300  2         45              3 XXX  <== Upper Limit
 93200  3    7    457             4 XXXX
 93100  4    7    4567            7 XXXXXXX
 93000  4    7    4567            8 XXXXXXXX
 92900  5   37    34567          18 XXXXXXXXXXXXXXXXXX
 92800  5   37    34567          22 XXXXXXXXXXXXXXXXXXXXXX
 92700  5   37    34567          33 XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
 92600  5   37    34567          33 XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
 92500  5   37    34567          24 XXXXXXXXXXXXXXXXXXXXXXXX
 92400  5   37    34567          20 XXXXXXXXXXXXXXXXXXXX
 92300  5   37    34567          17 XXXXXXXXXXXXXXXXX
 92200  5   37    34567          13 XXXXXXXXXXXXX
 92100  5   37    34567           9 XXXXXXXXX  O, C
 92000  3   37    347             7 XXXXXXX
 91900  3   37    347            11 XXXXXXXXXXX
 91800  3   37    347            13 XXXXXXXXXXXXX
 91700  3   37    347            10 XXXXXXXXXX
 91600  3   37    347             6 XXXXXX  <== Lower Limit
 91500  2   3     34              2 XX
 
 
TPO CONTROL PRICE (HPTP)     92700
AVERAGE TPO PER TIC         12.524

ROT PROFILE identifies the day ranges.  The largest number is the latest day.
  7 = Jan 15
  6 = Jan 14
  5 = Jan 13
  4 = Jan 10
  3 = Jan 9

 

Overlay #2  Single distribution but close below the Lower
            Limit, therefore not in balance.  Transitioning
            to a trend probably.  There is a breakout from
            the lower limit of yesterday (91600).

TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
MAR 03 S&P 500 (CME-IOM)     
01 10 03 TO 01 16 03

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
 93500  1         5               1 X
 93400  1         5               2 XX
 93300  2   4     45              3 XXX  <== Upper Limit (no longer valid)
 93200  3   4     457             4 XXXX
 93100  4   4     4567            7 XXXXXXX
 93000  4   4     4567            8 XXXXXXXX
 92900  4   4     4567           17 XXXXXXXXXXXXXXXXX
 92800  4   4     4567           21 XXXXXXXXXXXXXXXXXXXXX
 92700  4   4     4567           29 XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
 92600  4   4     4567           26 XXXXXXXXXXXXXXXXXXXXXXXXXX
 92500  5   48    45678          19 XXXXXXXXXXXXXXXXXXX
 92400  5   48    45678          15 XXXXXXXXXXXXXXX
 92300  5   48    45678          14 XXXXXXXXXXXXXX
 92200  5   48    45678          14 XXXXXXXXXXXXXX
 92100  5   48    45678          10 XXXXXXXXXX
 92000  3   48    478            11 XXXXXXXXXXX
 91900  3   48    478            16 XXXXXXXXXXXXXXXX
 91800  3   48    478            16 XXXXXXXXXXXXXXXX
 91700  3   48    478            15 XXXXXXXXXXXXXXX  O
 91600  3   48    478            10 XXXXXXXXXX  <== Breakout
 91500  2   48    48              6 XXXXXX
 91400  1    8    8               6 XXXXXX
 91300  1    8    8               4 XXXX 
 91200  1    8    8               2 XX  C
 91100  1    8    8               1 X
 

 
TPO CONTROL PRICE (HPTP)     92700
AVERAGE TPO PER TIC         11.080

ROT PROFILE identifies the day ranges.  The largest number is the latest day.
  8 = Jan 16
  7 = Jan 15
  6 = Jan 14
  5 = Jan 13
  4 = Jan 10
 

Overlay #3  Trending.  Possible congestion starting
            around 90100.

TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
MAR 03 S&P 500 (CME-IOM)     
01 13 03 TO 01 17 03

 PRICE DYS  L/F ROT PROFILE *  TPOS TPO VOL OVERLAY *
 
 93500  1   5     5               1 X
 93400  1   5     5               2 XX
 93300  1   5     5               2 XX
 93200  2   5     57              3 XXX  <== Upper Limit (no longer valid)
 93100  3   5     567             5 XXXXX
 93000  3   5     567             6 XXXXXX
 92900  3   5     567            12 XXXXXXXXXXXX
 92800  3   5     567            15 XXXXXXXXXXXXXXX
 92700  3   5     567            20 XXXXXXXXXXXXXXXXXXXX
 92600  3   5     567            17 XXXXXXXXXXXXXXXXX
 92500  4   5     5678           13 XXXXXXXXXXXXX
 92400  4   5     5678            9 XXXXXXXXX
 92300  4   5     5678            9 XXXXXXXXX
 92200  4   5     5678           11 XXXXXXXXXXX
 92100  4   5     5678            9 XXXXXXXXX
 92000  2         78             10 XXXXXXXXXX
 91900  2         78             15 XXXXXXXXXXXXXXX
 91800  2         78             15 XXXXXXXXXXXXXXX
 91700  2         78             14 XXXXXXXXXXXXXX
 91600  2         78              9 XXXXXXXXX
 91500  1         8               5 XXXXX
 91400  1         8               6 XXXXXX
 91300  1         8               4 XXXX  <== Lower Limit (no longer valid)
 91200  1         8               2 XX 
 91100  1         8               1 X
 90900  1    9    9               1 X
 90800  1    9    9               3 XXX
 90700  1    9    9               3 XXX
 90600  1    9    9               2 XX  O
 90500  1    9    9               2 XX
 90400  1    9    9               3 XXX
 90300  1    9    9               3 XXX  C
 90200  1    9    9               7 XXXXXXX
 90100  1    9    9               9 XXXXXXXXX  <== Pause
 90000  1    9    9               5 XXXXX
 89900  1    9    9               4 XXXX
 89800  1    9    9               1 X
 
 
TPO CONTROL PRICE (HPTP)     92700
AVERAGE TPO PER TIC          6.973

ROT PROFILE identifies the day ranges.  The largest number is the latest day.
  9 = Jan 17
  8 = Jan 16
  7 = Jan 15
  6 = Jan 14
  5 = Jan 13


Overlay #3a  Latest Day Overlay + Meta-Profile

 91400  1         8               6 XXXXXX
 91300  1         8               4 XXXX  <== Lower Limit (no longer valid)
 91200  1         8               2 XX <== Breakout
 91100  1         8               1 X
 90900  1    9    9               1 X          c        The profile clearly
 90800  1    9    9               3 XXX        bcd      shows the pause to 
 90700  1    9    9               3 XXX        bcd      come late in the day
 90600  1    9    9               2 XX O       bcd      (n = 14:30, p = 15:00).
 90500  1    9    9               2 XX         bd
 90400  1    9    9               3 XXX        bde
 90300  1    9    9               3 XXX C      egp
 90200  1    9    9               7 XXXXXXX    efghinp
 90100  1    9    9               9 XXXXXXXXX  efgijlmnp
 90000  1    9    9               5 XXXXX      fjlmn
 89900  1    9    9               4 XXXX       jklm
 89800  1    9    9               1 X          k
            

To get Overlay data (example):
On homepage left sidebar scroll down to "Data" section (about 2/3 of way down)
  Click on 'End-of-Day Data'
    Scroll down to 'End-of-Day Visual Graphics ONLY'
      Click on 'Download Data'
        Click on checkboxes for Visual Graphic data you want
          Scroll to bottom of page, enter username and password
            Click on 'Get Data' button

  For up to 10 days of history:
    About 15 lines from the top of the data page
      Click on 'Previous 10 days of history'

  For explanation of Visual Graphics information:
    About 20 lines from the top of the data page
      Click on 'Explanation of CISCO Visual Graphic'

      Visual Graphics Background

      Explanation of Visual Graphic
For more information phone 1-800-800-7227 or 1-303-306-1521
Send e-mail to CISCO <dljones@cisco-futures.com>
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