The Delta/Price Relationship

Many who follow the markets from an auction market theory perspective have been expecting price declines in the US equities markets in recent days (if not weeks). I'm one of those. However, one also needs to be in the moment, in sync with whatever the most recent and complete data is telling us.

Today, for reasons contained in my trading plan, the first opportunity the market presented was a short around 1346-ish. The chart below (orange lines) depicts the virgin supply zone I was interested in shorting. I have a very specific definition of what virgin supply is, but that's a story for another day.

Today, I want to focus on the benefit of following order flow transitions via cumulative delta. Take a gander at the two bars circled in orange in the lower pane. Those two bars contained near -20,000 delta. This occurred shortly after price touched the supply zone. For many new to delta tools, all that selling is a sign of comfort if short. For me, it was a sign to tighten stops and NOT take any second stab at a short.

Why? Because there is a tight correlation between delta and price. Price doesn't exist in a vacuum and neither does delta (or volume if you wish). When that correlation is disrupted, it's telling you something. Statistically speaking, that much negative delta should have moved price at least 5 full ES points, probably more. What did it do? It dropped 6 ticks from the supply zone. That's a HUGE amount of selling with almost no reciprocation by price.

Think of it like friction. In this case, the friction being resting orders to buy. This relationship between price and delta can provide excellent feedback throughout the day on what traders are doing.