Absorption - Reading Supply and Demand on a Footprint Chart
Definition of Absorption: Scenario where we see disproportionate volume near the extreme of a bar with little to no price movement beyond that level.
Even more ideal is seeing this pattern of larger than normal volume occur at a support or resistance level.
Selling Absorption - occurs when aggressive sellers are met with passive buyers who "absorb" the sellers' supply.
Buying Absorption - occurs when aggressive buyers are met with passive sellers who "absorb" the buyers' demand.
Passive buyers or passive sellers often are large traders or institutions that place large orders at prices they want to defend. They "sit" on those prices and absorb supply or demand from the aggressive traders.
IF the aggressive buyer or seller is unable to "take out" the level where absorption is occurring then the market will often bounce away from the area of absorption as the aggressors are quick to cover their positions.
In the Footprint Profile screenshot below of the S&P 500 emini futures, look at the orange dots 1 and 2.
#1 - Here we see a market that has quickly fallen and now is experiencing a surge of volume in the lower 1/3 of the bar AND lower end of the trading range. Additionally, note how the footprints are all red (there is a yellow box drawn around them). This represents aggressive selling. Also not how on the far left of the chart shows a high volume node.
SUMMARY - Selling absorption at low of range and near a high volume level.
#2 - Here we see just the opposite of #1. After testing the the range low in #1, the market rotated up to test the recent swing high where it was met with passive sellers. Probably the same folks who just bought it 5 handles (points) lower!
SUMMARY - Buying absorption at swing high.
Volume vs. Range
Another form of absorption that happens regularly on a Footprint Chart is the idea of volume vs. range or effort against result. For example a traditional buying climax at the end of an up move will often see huge volume but with an inability for the market to push higher (narrow range bar or bars). Interestingly enough, market bottoms usually exhibit slightly different characteristics by having climactic volume and create longer range bars that closes higher.
The MarketDelta Footprint allows traders to see this sort of thing on a micro level. Here is how one trader described using the Footprint to spot absorption.
It is going to be easiest to spot absorption using either the Volume, Bid Ask, Profile, or Imbalance Footprint. Pay more attention to the size of the numbers rather than the colors. As price moves round you can for example see supply enter at a level. You will perhaps get 2 or maybe even 3 deep red footprints with large numbers on the bid.
This represents demand from passive buyers who are providing liquidity to soak up all the supply from aggressive sellers.
The key thing to notice when this pattern occurs is whether it manages to stop price or not. If it does look for a good bounce.
If the level that had the absorption does not hold, then obviously price will carry on down. As you might expect, this prior support will now become resistance and often price will return to this area later to check it out since it experienced active interest by BOTH buyers and sellers.
This same retest is frequently seen on the MarketDelta Edge Zones.
Often the bears will now defend this territory that they have just won and it is often evidenced by fairly high volume traded at the ask.
This represents passive sellers selling at previous support to the willing aggressive buyers.
Watch this video to learn how to setup a Footprint chart to spot volume absorption.