New to it, been studying it. Question: Say price has a good upside breakout of a range but on strong negative delta, then maybe a shallow pullback, then the uptrend continues on positive delta. Wouldn't those first up bars with that delta divergence indicate "absorption"? Thankye.
gpt says Yes, you're on the right track with your analysis. Let's break down the scenario: Upside breakout with strong negative delta: This typically means that despite the price moving higher, there is significant selling volume or pressure (negative delta) in the market. This can indicate that existing holders are selling into the strength of the breakout, potentially to take profits or due to skepticism about the sustainability of the move. Shallow pullback: After the initial breakout, if there's a shallow pullback in price, it could suggest that the selling pressure (negative delta) has been absorbed by buying interest at slightly lower prices. This absorption phase indicates that buyers are stepping in to support the price, preventing it from falling significantly despite the earlier selling pressure. Uptrend continues on positive delta: If after the shallow pullback the uptrend resumes and the delta turns positive, it suggests that buying interest has strengthened. Positive delta indicates that buyers are now more aggressive and are willing to buy at higher prices, pushing the price further upwards. Interpreting delta divergence: The divergence between price action (upside breakout) and delta (initially negative, then possibly turning positive) can indeed indicate absorption. In this context, absorption refers to the market's ability to absorb or counteract the initial selling pressure. The shallow pullback followed by a positive delta suggests that sellers were absorbed by buyers who saw value in the higher price levels after the breakout. In trading terms, this absorption indicates that despite the initial skepticism or profit-taking (negative delta), the underlying buying interest is strong enough to support and continue the uptrend. Traders often look for signs of absorption like this to gauge the strength of a breakout and the potential for further price increases. Therefore, your observation about delta divergence indicating absorption is correct. It reflects a transition from selling pressure to buying support, affirming the potential for the uptrend to continue as buyers step in to drive prices higher.
You have to look at the per-bar delta statistics for short-term trading. I don't know if I would commit to a swing trade using cumulative Delta as it seems to be too far of a lookback for most futures traders. Maybe (probably)I am ignorant of how you use cumulative Delta, It may be useful for a trend filter?
I understand what you mean about short-term interpretation but I have found CD useful in some breakout and trend scenarios, though I'm still experimenting. For instance, in a trading range you'll usually see CD generally follow the swings within the range, but there will be times where there are sustained divergences prior to a price break, where the break then follows the delta. Or price is basically just flat for a while, CD also flat, then CD becomes negative or positive for some number of bars prior to a price break in the direction of the CD. Or if CD has been confirming a trend, it will continue in that direction during a reaction in the price trend, in a divergence with that reaction, then after that reaction the price trend resumes. CD would of course be used with other confirmations in all scenarios.