The folks over at MarketDelta refer to the net order flow Ask volume minus Bid volume as “Delta.” We’ve discussed this concept a few times on this blog, and shown off some of the unique volume tools that MarketDelta provides for studying “Delta.”

Some of the biggest news in the last week has been about the price of oil and the release of oil reserves which should, ultimately, reduce prices in oil. And initially, there was indeed a strong reaction as prices fell sharply. But only a week later, prices are back up. Who knew?

The answer: traders who study order flow.

Take a look at this very interesting chart that shows the progression of order flow as oil traded since the news announcement. It is quite clear that the actual volume entering the market was not matching the price action. The bottom indicator is another example of the “Delta Momentum” tool we showcased earlier. The middle section on the chart is just the basic Volume Breakdown indicator that MarketDelta provides to study per-bar Delta.

Oil futures contract, CLQ1, for June 2011

One of the powerful applications of a computer is to not just tally up the volume numbers for order flow analysis, but also to organize those results in novel ways. One program that does this with many flexible options is the MarketDelta software. This program provides a tool that accumulates the net volume activity on the Buy side or Sell side, but then resets this number as soon as any bar on the chart changes from Buy-dominant to Sell-dominant, and vice-versa. It is similar to the cumulative order flow volumes discussed in previous articles, but it builds these accumulations many times a day.

As you can see, when you look at order flow over many bars and compare it to the actual price action, you often get some alarming divergences that are quite predictive of market reversals. Take a look at this chart of the Oil August contract.

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Here is a good example of how you can use day’s net cumulative order flow activity to see changes in actual trading mentality among all the players in the contract.

The indicator plotted on the chart is a Footprint derivative that shows the day’s total Ask volume minus the day’s total Sell volume. If positive, most of the volume during the session has been from those making market orders to buy the contract. If negative, sellers have dominated the session.

When this net activity divergences with price action, something is going on that is very interesting and highly predictive most of the time.

This is the CLN1 contract.

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Here is another example showcasing the features of the Reversal (aka Point and Figure) timeframe of a Footprint chart. Every other bar shows a market attempt in the same direction. On this chart, a push higher left 41 and 37 contracts on the Ask (Market orders to Buy), then it reversed as the sellers took over, then the next move by the buyers pushed prices higher, but with only 5 and 3 contracts on the Ask. By comparing these two efforts by buyers to move prices higher, you can clearly see that each buying effort was not equal. The second push was on weak energy. This was a good clue for a Short trade. Had you taken it, the profits were quick and lucrative.

There were three excellent reasons on this Footprint chart to buy into the market and go Long. As you can see, the clues are obvious and fairly easy to see after you get used to these  patterns.

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Here is a good graphic that illustrates how Footprint data revealed a likely rally in oil; and that’s exactly what happened.

The Footprint clearly shows declining selling energy. Following this declining push down is a 50 cent rally up.

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