The newest technology - unlike any other indicator How and why the Nielsen Indicators can help make you a better trader - 1 -
Table of Contents THE LATEST DEVELOPMENT IN ANALYSIS CAN GIVE YOU A REAL ADVANTAGE... 3 THE OLDEST RULE OF ECONOMICS THE LATEST TECHNOLOGY... 4 The law of supply and demand... 4 ANALYSING MARKET DEPTH... 10 analysis of market depth over time...11 technology behind the scenes...11 THE RATIOS USED IN THESE INDICATORS... 12 1. shares ratio...12 2. buyers/sellers ratio...13 3. smart money indicator...14 SEEING THE INDICATORS IN ACTION... 17 HOW TO USE THESE INDICATORS... 19 POTENTIAL TRADING SIGNALS... 19 price falling demand increasing...19 price steady demand increasing...20 demand increasing, smart money entering...21 large spikes of smart money...22 price rising demand falling...23 price rise, demand falling, mug money entering...24 WAYS TO ACCESS THE NIELSEN TOOLS... 25-2 -
The latest development in analysis can give you a real advantage The Nielsen Supply Demand indicator is like no other indicator in the world. By tracking the changes in the market depth queue over time you can now clearly see the buying pressure from the people actively investing in any stock on the ASX. These indicators are not derived from any historical price, volume data or any other data that comprise the indicators that you re used to. Instead, it monitors the intentions of the buyers and sellers. At any time, you can see whether the buyers or sellers are taking control and also get an idea of whether these traders are trading larger than usual parcels of shares. This information can give you another very important dimension to your analysis of a stock and we believe that once you start using it, you won t ever be able to trade with out it ever again. Please read all the information in this document to get a better understanding of how it can benefit you. - 3 -
The oldest rule of economics The latest technology The law of supply and demand The oldest rule in economics is the fundamental reason why the Nielsen Supply Demand indicators can work. Demand UP : Price UP Demand DOWN : Price DOWN In a market economy, the prices of goods and services are influenced by the interaction of the market forces of supply and demand. Monitoring the intentions of people wanting to buy or sell a stock The Nielsen Supply Demand indicator is unlike any other indicator in the world. By tracking the changes in the market depth queue over time you can now clearly see the buying pressure from the people actively investing in any stock on the ASX. It is a true forward looking indicator. It is not derived from any historical price, volume data or any other data that comprise the indicators that you re used to. Instead, it monitors the intentions of the buyers and sellers. At any time, you can see whether the buyers or sellers are taking control and also get an idea of whether these traders are trading larger than usual - 4 -
parcels of shares. This information can give you another very important dimension to your analysis of a stock and we believe that once you start using it, you won t ever be able to trade with out it ever again. Please read all the information in this document to get a better understanding of how it can benefit you. - 5 -
Terms used There are some basic terms used with this new technology that you should become familiar with. demand We use this term commonly in our communications and it generally refers to the shares ratio (see above). The full definition is really Supply and Demand but it is often shortened to one word demand E.g. when we say, the demand is increasing we generally mean that the buy side of the market depth queue is increasing. Or more simply put the buying pressure is increasing. As an aside, because the indicator is a ratio, the indicator can rise because: 1. The total shares on the buy side have increased 2. The total shares on the sell side have decreased 3. A combination of 1 and 2 Either way, the buying pressure is increasing which often translates to share price increasing. smart money We define Smart Money as people buying larger quantities of shares than is normal for a particular stock. Generally when people buy large parcels of a stock it means that : they know something or they think they know something Either way it doesn t really matter because the physical act of buying shares puts upward pressure on the share price. - 6 -
How do we see the Smart Money entering? Simple. Because we already have a ratio of the total amount of buyers and sellers and a ratio of the total number of shares on either side of the market depth queue we can easily see if the buyers are spending more money than usual. Confused? Don t be If the shares ratio is increasing but the buyers/sellers ratio is decreasing it means that there are less net buyers yet they are buying larger quantities of shares. How do we see this? If you are using Phoenix AI, you compare the two indicators. When the buyer/sellers ratio moves closer or crosses below the shares ratio it means that smart money is entering. Once the indicators have crossed, the further apart they get indicates that the buyers are spending much bigger money than normal. mug money This is the opposite of smart money. These are the taxi drivers, the mug punters. These are the people who have seen a stock start moving and jump in with a small amount of money hoping the stock will keep rising. Often they are buying stock from the smart money buyers who bought it at a much lower price. - 7 -
The law of supply and demand If there is only a limited stock of some product available, competition between potential buyers tends to see prices rise, i.e. consumers bid up prices. Similarly, competition between sellers of the product tends to see prices fall, as they try to attract buyers. Think back to that first, simple diagram on the blackboard in high school economics. If you happened to miss that class, don t worry, it really is simple. The diagram is the same one you see to the right. Whatever the product might be; ice cream, cars, plasma screen televisions, even shares, more people will want to buy when the price is low than when the price is high represented by the demand curve on the graph. Conversely, more people will want to sell when the price is high as opposed to when it is low represented by the supply curve on the graph. Where the number of willing buyers and the number of willing sellers intersect you get the market price and the quantity that will change hands. - 8 -
The next thing that was taught to us in that first economics class was what happens when supply or demand changes. When demand increases when more people want to buy a stock for example - and supply doesn t, the price will increase (represented on the graph by the demand curve moving to the right). When supply increases when more people want to sell a stock, for example and demand doesn t, the price falls (represented on the graph by the supply curve moving to the right). The reverse happens when supply or demand fall. Simple concept isn t it? The incredible thing about these indicators is that they can actually track the changes in supply and demand of a stock so that you can look back in time and see trends and changes. - 9 -
Analysing market depth The stock market is probably the most perfect example of a free market that you can get. Therefore you d expect that if there were more buyers than sellers then the price would increase and vice versa. Luckily, the stock exchanges supply the information on the number of buyers and the number of sellers in a format called the Market Depth Market Depth Queue Shows total number of buyers and sellers Market depth has become a valuable tool since its introduction to main stream trading in the last 7 years or so. In fact, a recent web poll conducted by The Inside Trader found that 86% of all traders examined the market depth before making a trade. The only problem with market depth is that it only shows a snapshot at any point in time. It was not possible (until now) to see market depth changes over time. If you can see these changes and chart them, you gain a valuable insight into whether the buyers or sellers are taking control. - 10 -
Analysis of market depth over time At any given moment the depth queue can change. As soon as a new Buy or Sell order goes into the market it will be shown in the depth queue. This gives real time supply and demand. An instantaneous view of this data can shed some light as to the supply and demand properties of each individual stock, but it s the trend that is probably the most important. As a trader in the stock market, we only care about which direction the stock is most likely to go. Therefore, if we saw a large increase in demand, we d expect the price to increase. Until now, no-one has successfully harnessed technology to see this change in Supply/Demand characteristics even though Changes in supply and demand are possibly one of the MOST fundamental causes of short term change in the share price. Better still, the share price will normally change AFTER a change in supply or demand. In short, monitoring the changes in supply and demand can help predict the short term direction of individual stocks in the market. technology behind the scenes To create this useful chart, a complex piece of software and a dedicated high end computer servers are used to capture around half a million potential transactions every day. Think about it. There are approximately 1800 stocks currently listed on the ASX. Our sophisticated computer system captures every piece of information in the market depth queue. It then performs a number of calculations to find out the supply demand levels against 6 different criteria and stores that information for future reference. It does this for every stock, every 5 minutes. Depending on the service you sue, you can either get end of day data or intraday 5 minute data. It is an amazing bit of technology and has been built by some of the best stock market programmers in the country. It has direct, high speed access to live ASX data and is incorporated for use in PhoenixAI market data and charting software - one of the most advanced trading tools in around. - 11 -
The ratios used in these indicators There are three ratios used to create three different indicators. All of them are important to understand to get the most out of these tools. 1. shares ratio This is the original Nielsen Supply Demand Indicator. It is the ratio made up by dividing the total quantity of shares on the sell side into the total number of shares on the buy side. A shares ratio of 1 means that there is an equal number of buyers as sellers A shares ratio of 2 means that there are twice as many buyers as sellers A shares ratio of 0.5 means that there are twice as many sellers as buyers Taking this stock for example, The total Quantity of Shares on the buy side of the market depth queue amounts to 1,362,349 while the total Quantity of Shares on the sell side of the market depth queue amounts to 964,904. The calculation: 1,362,349 = 1.4 964,904 This means that there are 1.4 times as many buyers as sellers. - 12 -
2. buyers/sellers ratio This was the second major development of the Nielsen Indicator. Instead of creating a ratio using the total number of shares on either side of the market depth queue, we created a ratio using the total number of physical buyers on either side of the market depth queue. This now gives you the ability to compare how many shares the average buyer is buyer compared to the average seller.(see smart money following) A ratio of 1.0 means that there are an equal number of physical buyers on either side of the depth queue. A ratio of 2.0 means that there are twice as many physical buyers compared to the sellers in the depth queue. A ratio of ½ or 0.5 means that there are twice as many physical sellers compared to the buyers in the depth queue. Taking this stock for example, The total Number of Buyers on the buy side of the market depth queue amounts to 36 while the total Number of Sellers on the sell side of the market depth queue amounts to 41. The calculation: 36 = 0.87 41 Here there was slightly more physical sellers than buyers - 13 -
3. smart money indicator To make the smart money concept (see below) less confusing, we have developed the Smart Money Indicator which is currently available from The Inside Trader website. This indicator is created by dividing the buyers/sellers ratio into the shares ratio. Smart Money Indicator = Shares Ratio Buyers/Sellers Ratio Put simply, when the indicator increases, it means that (on average) the buyers are wanting to buy more shares than before. If it is a large increase, it means that the buyers appear to be very serious. This tool provides an extremely useful tool when making decisions to invest in a stock. There are no hard and fast rules and sometimes it can give a false signal, but generally, when there is a large rise in the Smart Money Indicator, a price rise can often follow. Sometimes significant rises can occur. Continuing the example from earlier: Smart Money Indicator = Shares Ratio Buyers/Sellers Ratio = 1.4 / 0.87 = 1.61-14 -
A smart money indicator value greater than one indicates that smart money is present. - 15 -
Traps for Beginners This is an outstanding surveillance tool that can monitor the pressure (and size) of traders intentions. Used correctly you can easily become a better trader but like anything in the stock market you have to look at the bigger picture. Following are some important points to be aware of... Always check the market depth queue before relying on this indicator. Sometimes people will put in unrealistic bids that are way out of the market which will make the indicators increase. Make sure that there is enough depth in the queue to make it a tradable stock. With really small volumes, even a trade of $10,000 can make the skew the buy/sell ratio significantly. These indicators are most accurate on small to mid cap stocks. With the big blue chips (eg BHP) this indicator cannot be relied upon as the data from the market depth queue at the end of the day is only a very small percentage of the days trading action. Also, large fund managers trade these stocks without entering the depth queue which we are monitoring. Keep in mind that undisclosed bids or asks are treated as $200,000 which is the minimum that an undisclosed bid or offer can be. It could be higher than this number but we don't know what it is. Make sure you always look at the indicators in relation to price. Keep in mind that in most cases, the indicators will be in sync with price. It is when there is divergence that there is money to be made. - 16 -
Seeing the indicators in action Below is an example of The Inside Trader smart money charts See how the Smart Money entered before a major price almost doubled? It makes sense doesn t it? If people are prepared to spend more money than usual they either know, or think they know, something. If they really did know something then we can all benefit. This tool provides an extremely useful tool when making decisions to invest in a stock. There are no hard and fast rules and sometimes it can give a false signal, but generally, when there is a large rise in the Smart Money Indicator a price rise can often follow. Sometimes significant rises can occur. - 17 -
Below is an example of the same stock viewing on a Phoenix AI chart See the area where the buyers/sellers ratio fell way below the shares ratio. This meant that the average buyer wanted to buy a lot more shares than the average seller wanted to sell. For money to become smarter the indicators don t have to cross over. If the buyers/sellers ratio is above the shares ratio you can see the smart money starting to enter if the gap starts to close. If the buyers/sellers ratio is below the shares ratio, you can see the money getting smarter when they start spreading further apart. (see example above) - 18 -
How to use these indicators Most of the time the indicators will be in sync with the price. This essentially proves the law of supply and demand. The real trading opportunities occur when there is divergence between price and the indicators. potential trading signals Below are six signals that can help identify the potential future price direction using these supply/demand indicators. We have used graphs from different programs as examples. You can find out how to access the different ways of seeing the Nielsen Indicators at the end of this document. price falling demand increasing This is one of the easiest signals to look for. Often, when a stock is in a downtrend it gets oversold. After a while, people spot this and start entering the depth queue on the buy side because they think it s been oversold. If they were right, the price fall reverses and starts increasing. If you want to try and pick the lows, this signal can really help your timing. - 19 -
Price steady demand increasing Sometimes a stock will be traveling sideways but you can see people entering the queue with the intention to buy. Once the buying pressure builds up enough, the price often starts rising. Again, this is a classed as a divergence between stock price and buyer demand. - 20 -
demand increasing, smart money entering This is often a powerful signal. When you see the demand increase AND you also see that it is being fuelled by smart money you can often expect a price rise in the future. The above is a phoenix chart The above chart is the Inside Trader chart - 21 -
large spikes of smart money Large spikes in Smart Money means that people are investing larger amounts of money. When you see a few of these spikes, especially in a downtrend, it means that the downtrend could be ending soon. The people who have invested heavily hopefully have done their homework correctly and you can benefit. It s often best to wait for a confirmation in buyer demand and trend reversal before entering. The above chart is an Inside Trader chart - 22 -
price rising demand falling When a stock price rallies, often the stock will get overbought. The depth queue can often show you when this point is nearing as the buyers will start drying up and the profit takers will come in. This can be seen by the shares ratio decreasing significantly whilst the price is still going up. Use this as a warning signal. - 23 -
price rise, demand falling, mug money entering When you see a stock rally and the demand is falling off at the same time that the Mug Money is entering it s often a signal that the rally is ending. Remember, mug money are the small time punters who think the price will rally for ever. They are often left high and dry. The smart money people are already in and probably selling to the mugs. - 24 -
Ways to access the Nielsen tools The Nielsen Indicators can be accessed by a variety of methods now. Please read below and compare the options to find what suits you best. The Inside Trader The Inside Trader is a stock market research company with a difference. The Inside Trader offers the following services: Daily scan results from the Nielsen Supply Demand Indicator The Nielsen Indicator End of Day Charts Service The Change of Directors Holdings Information Service Stockbroker Recommendation Consensus Information Service Stock Pick of the Week Various stock market educational services and products Phoenix AI Phoenix AI is a professional quality stock market information service. It is designed or serious investors and traders as well as casual ones. The software and data is provided by Phoenix AI to bring the market to your computer. Phoenix is continually developing and updating its features. StockScan StockScan is a web-based stock scanning utility. As a member, you can setup what scan(s) you wish to run at the end of each trading day. StockScan will automatically scan the ASX for you, notifying you by email of any stocks that match the criteria for your scans. - 25 -