Money Flow - yes it's pretty nutty to see MF up and stock price down - here's an explanation I bookmarked long ago. Sorry I don't have the link.
The concept of money flow can be confusing... but once you understand it... it can be very valuable. Money flow measures the net amount of money moving into a stock... or moving out of a stock. It is really a measure of whether, in the aggregate, investors are paying MORE than market price or LESS than market price for a stock. Let`s start with an example:
Acme is trading at $100 a share. One thousand shares are then bought at $100.25 a share. That would indicate that one thousand shares were purchased `on an uptick,` or at a price HIGHER than the market price. This is what we call a POSITIVE money flow. Next, one hundred shares are purchased for $99.75 a share. Those hundred shares represent a NEGATIVE money flow because they were bought on a downtick, or at a price LOWER than the market price. However, the NET money flow in our example is POSITIVE because there were 1000 shares purchased on an uptick and only 100 purchased on a downtick. Thus, there`s a net positive money flow of 900 shares.
You would expect that most of the time, when a stock`s price is falling, money is flowing out of the stock, and when a stock`s price is rising, money is flowing into the stock. However, this is not always the case. In the above example, the stock price dropped to $99.75 a share, but the money flow is positive. When stock price and money flow do not move in sync, this is called a `divergence...` and when there`s a divergence... you might have an opportunity to make money. The reason: Money flow theory suggests that price follows money. This suggests that a `divergence` can only last for a short period of time. In other words, when you see a `divergence,` it could mean that the stock price is about to reverse direction. There are two types of money flow `divergences` that we talk about in our Money Flow segments:
Buying on Weakness
`Buying on Weakness` indicates that money is flowing into a stock even though its price has been falling. This could be an opportunity to buy the stock right before it is likely to rise.
Selling on Strength
`Selling on Strength` indicates that money is flowing out of a stock even though its price has been rising. This could be an opportunity to sell the stock right before it is likely to fall. |
