A question about the actions of Large Players

[Pascal]

I woke up this Sunday morning, thinking to do some more back-tests while the rest of the family is still sleeping, and I find myself in a deep overnight discussion about the EV method. So, let me jump in here...

There are four elements in this EV formula:
- The minute time interval
- The price inflection (the price change from one minute to the next)
- The Adapted Larry Williams' formula using the true range
- The Large/Small players separation method

I believe that the "One Minute" time interval is a critical aspect of the method. Not the fact that the period is one minute, but that the analysis is made at exact and regularly identical time intervals. I would have preferred to have 15 seconds time intervals, but do not have the tools to do that yet.

What the EV method does is to look at "one minute price samples" and is there was a price change (of one cent or 10 cents, that is not important), to start digging out the reason why the price changed.

It is the fixed size period of time that allows us to be sure that each sample represents the same "time" opportunity for market players to move the price. I believe that shorter time periods such as 15 or even 5 seconds would give better, more accurate results.

What happened during this one specific minute, why did for example the price move up by one cent?

- You could have had some equilibrium trading during that minute and then at the final second, by chance one retail investor would buy 100 shares at market and would push the price higher... Or as suggested in this tread, that some algo would have been specifically programmed to fool the EV formula.
- In general, what happens during one trading minute is that you have algo buyers and algo sellers that sample the available liquidity and push their orders by making sure that they do not move the price in their own direction until they have accumulated/sold all their shares. So we have a very well balanced market during each trading minute. (Of course, if there is big news or if a fund has accumulated enough and wants to push the price higher, then imbalance is intentionally generated as a new trend starts.) What EV tries to measure is the small imbalance that is responsible for the price change. EV will take each minute a sample of these "imbalances" (or Effective Volume)
and will then separate them into Large or Small size.
- Something else could happen during one minute: it is the very large sitting bulk of shares either at the Bid or at the Ask. In theory, you could have one fund putting 1 million shares for sale at a specific price (either visibly or invisibly) and you would have "large" buyers coming in every minute, pushing the price higher by one cent until it reaches the offering price for the big lot, printing a "large active Buyer" on the EV sampling. One small seller would then push the price back down, and the same is repeated until the big chunk is all gone and the price is thus free to move higher. This is of course just theory, because those who have such large chunk of shares to trade also own the right tools to do it without having to push large orders at once.

To make it short, the LEV/SEV method tries to catch the change in market equilibrium.

The actual method could be improved by shortening the analysis time interval and by using tick data instead of the Larry Williams formula to count shares within one time interval.

Many people think that EV shows strength. It is not true. EV shows a change in equilibrium. This indicator is valid only when the price itself it in an equilibrium.

For example:
- If the price makes a double top but the EV pattern makes a lower high, then you can conclude that buyers are exhausted.
- If the price is pulling back to a 50MA support line but EV is hardly decreasing, it means that long term large holders are keeping their position and thus that the uptrend will probably renew later on.
- Leading stocks will often see large players sell while the price reaches a new high. This is just normal and you cannot conclude that the price will move back down.


Pascal

[grems8544]

The actual method could be improved by shortening the analysis time interval and by using tick data instead of the Larry Williams formula to count shares within one time interval.

I think this is the key in the next evolution of EV.

Ellis' comments notwithstanding, I've noticed many trades which are large-block trades do not budge the TEV lines, or do so disproportionately. We certainly could argue (successfully) that over that 1 minute period that the equilibrium of the buyers and sellers did not change, but when I step back and look at a large block transacting, *something* is going on with the stock, yet TEV will not reflect the massive buying or selling. As an example of this I provide GRT's action on Friday:



Here, we see that over 3M shares transacted in a single minute, yet LEV/TEV did not budge. Due to scaling you cannot see the volume action after this -- there were numerous smaller blocks transacting (2K-10K size), which moved LEV/TEV around. Certainly, the 3M transaction did not upset the equilibrium, but when I step back and look at the stock as a whole, the 3M represents a $30M transaction by *somebody*, and I would want to know which way this moving (a buy or a sell).

Another example is when a large purchase barely moves TEV, but smaller volume moves TEV a considerable amount. As an example of this is COMV on 5/23:



Here, we see that early in the trading day, a considerable amount of a volume transaction occurs (bottom trace, red), and LEV (blue) and TEV (yellow) (middle traces) are barely moving. Later in the day, we have significant movement in LEV and TEV, yet the relative volume levels are much lower.

I think that in both these examples that volume vs. TICK information would be more indicative of the bigger picture for the stock, not just the equilibrium change.

My three cents (inflation) ....

pgd