Demand oscillator construction with a momentum overlay

Split volume into opposing pressure series

The demand oscillator is a histogram of buying pressure versus selling pressure used to read accumulation versus distribution. Construction starts with an on-balance-volume style assignment of volume to those two series.

On a price rise, buying pressure equals volume and selling pressure equals volume plus the percentage price change. On a price decline, those assignments reverse: buying pressure takes volume plus the scaled percentage price change, and selling pressure takes raw volume.

Scale the price-change term

The percentage price change is first lifted above one by a constant K. K equals three times the close divided by a volatility average, defined as a 10-day moving average of a two-day high-low range.

Plot the demand-oscillator histogram

Buying pressure and selling pressure are plotted as a histogram. Buying pressure above selling pressure is a positive reading and corresponds to the related demand index being above -1. Selling pressure above buying pressure, with the histogram below zero, is a negative reading.

Why a momentum overlay is added

Weekly histogram signals are described as often remaining in force for four to six months, with sell-side turns arriving later than buy-side turns. A 5- and 10-period momentum of the oscillator is added to offset that lag.

Three ways to read demand-oscillator momentum

Demand-oscillator momentum is read in three ways: a cross of the zero line, a break of an uptrend or downtrend in the momentum series, and a positive or negative divergence versus price. Divergence here means a disagreement between a price extreme and the matching high or low of the oscillator or its momentum.

Weekly stance, then daily confirmation

The procedure is staged by horizon. Weekly studies set the intermediate stance. Daily 5- and 10-period momentum is then read for shorter turns, extremes, and multi-week divergences.

In one daily equity-index example, five-day momentum ranged from -0.37 to 0.35. Turns from those extremes were treated as short-horizon clues, while several-week divergences and overbought or oversold readings on the 5- or 10-period series were treated as the more important conditions.

When the 5- or 10-day momentum becomes too choppy to read, the procedure substitutes the slower demand oscillator and the weekly studies rather than forcing short-horizon momentum signals.

The same three signals across markets

Worked weekly and daily examples on an equity index, interest-rate futures, gold, and the yen illustrate the same three signal types: zero-line crosses, breaks of momentum trend lines, and price-momentum divergences. Those examples include cases where buying-pressure trend breaks preceded a later decline.