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Incomprehensible divergence between price action and cumulative delta bars
Hi,
here is a chart of stock GRTS on the date of January 19 2021. 1mn chart.
As you can see the stock goes straight up, but the cumulative delta bars straight down.
How can it be? Those bars are supposed to be the difference between ask and bid volume. How can a price go straight up if there are constantly more BID volume?
This is incomprehensible.
I use sierrachart stock feed.
If you use IQfeed can you post your own similar chart?
Can you help answer these questions from other members on NexusFi?
This is call absorption, sellers are putting a lot of contracts aggressively (and cumulative delta is only about aggressive orders) but passives orders on buyers side are more important... So price goes up and cumulative delta goes down...
Yes, this is what happens, but concretly, it is hard to imagine how the price can go constantly up on a majority of orders hitting the bid.
This would imply in this case buyers lifting the bid. But how could they lift the bid without orders hitting the ask, which should be visible as positive delta?!
I understand theoritically what happens and what an absorption is, we see it everyday, but usually on small moves, but for a move of that amplitude as shown in the chart, in particular on the right side... is beyond comprehension.
(And I checked the data from multiple independant sources, it is correct.)
Think about it this way. Cumulative delta is measuring the amount of buying and selling done with market orders, basically. Market orders are considered aggressive - just get me in! Whereas limit orders are considered to be less aggressive. "I want to buy, but not at this price, a bit lower."
BUT, let's say that you're a big fish, and you're thinking, "I want to get in long but I want to buy 10,000 contracts and I want good execution/don't want anyone trying to push it in my face." How do you do that? Generally with limit orders either spaced out in a zone, or with an iceberg type of order which will break up your order into small increments and feed them out very quickly as they're filled. So it looks like a bunch of 1's, 2's etc but in reality it was one guy buying 5000 contracts and he was able to get it in a three tick zone. There are actually programs that aggregate those orders to sniff out those tactics.
So in this case, you might see a bunch of cumulative delta go off but not be confirmed in the price. Because some big fish was buying or selling a boat load with limit orders. And if that's happening repeatedly, what will happen is traders seeing that absorption will begin to pull their sell limit orders, and it ends up taking much less delta to move the price upwards.
tl;dr That's my best guess as to how these things happen. Repeated absorption via limit orders followed by capitulation, traders yanking limit sells and the price moving up on comparatively little delta volume (or vice versa).
Algos can do whatever they please with delta for they have multiple ways to balance it out with correlated assets. On itself delta is completely misleading.