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Stocks & Commodities V. 19:8 (18-32): Balance Of Power by Igor Livshin
INDICATORS

MIKE YAPPS
Who’s The Boss?

Balance Of Market Power

Who’s in charge, bulls or bears? It doesn’t take higher-order
math to get a good reading.
by Igor Livshin
he balance of market power (BMP)
indicator measures the strength of
the bulls vs. the bears by assessing
Every day, bulls and bears compete with each other in the
marketplace. The idea behind the BMP calculation is to assign
a score for both bulls and bears based on their daily
performance related to price movement.
For each market day, the indicator is calculated by using
the formulas shown below. First, three reward values are
calculated for bulls and bears:

T the ability of each to push price to an 1 Reward_Based_On_Open

extreme level. I deliberately
developed BMP not to be a range-
bound indicator, so it is as sensitive
at extreme points as it is at other
levels.
2 Reward_Based_On_Close
and
3 Reward_Based_On_Open_Close.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:8 (18-32): Balance Of Power by Igor Livshin

Each reward is calculated relative to the full price movement

for that day (HighPrice-LowPrice). High Price
Bulls' reward based on open
REWARD BASED ON THE OPEN PRICE Measures bulls' ability to push
This value measures the ability of each competing group — the price up from the open
bulls and bears — to push the opening price in opposite to the high price
directions (bulls up and bears down). The result of their
efforts is registered by the high and low prices (Figure 1). Close Price
Open Price
Bears' reward based on open
BullsRewardBasedOnOpen = (HighPrice - OpenPrice)/
Measures bears' ability to push
(HighPrice - LowPrice)
the price down from the open
BearsRewardBasedOnOpen = (OpenPrice - LowPrice)/ to the low price
(HighPrice - LowPrice) Low Price

FIGURE 1: SCORING. Bulls and bears are

REWARD BASED ON THE CLOSE PRICE
This value measures the ability of each competing group
(bulls and bears) to reach the closing price from opposite
directions (bulls up from the low price and bears down from
the high price). (See Figure 2.)
each rewarded by their success in pushing
price around. Here’s one of their rewards
based on movement from the open.

BullsRewardBasedOnClose = (ClosePrice - LowPrice)/ High Price

(HighPrice - LowPrice)
Bears' reward based on close
Measures bears' ability to push
BearsRewardBasedOnClose = (HighPrice - ClosePrice)/ Close Price the price down from the high
(HighPrice - LowPrice) to the close price
REWARD BASED ON OPEN-CLOSE Open Price
How each market day finishes (up or down) bears a great Bulls' reward based on close
psychological importance, so the winning group gets an extra
Measures bulls' ability to push
score (Figure 3).
the price up from the low
If ClosePrice > OpenPrice then Low Price
to the close price
BullsRewardBasedOnOpenClose = (ClosePrice -
OpenPrice)/(HighPrice - LowPrice)
FIGURE 2: Reward based on the price of the
BearsRewardBasedOnOpenClose = 0 close.
Else
BullsRewardBasedOnOpenClose = 0
BearsRewardBasedOnOpenClose = (OpenPrice -
ClosePrice)/(HighPrice - LowPrice) High Price
Bulls' reward based on
Once the rewards for both sides are calculated, the total daily open-close
reward is calculated for both bulls and bears. Measures bulls' ability to push
Close Price
(Open) the price UP from the open
BullsRewardDaily = (BullsRewardBasedOnOpen +
BullsRewardBasedOnClose + to the close price
BullsRewardBasedOnOpenClose) / 3
Open Price
(Close) Bears' reward based on
BearsRewardDaily = (BearsRewardBasedOnOpen + open-close
BearsRewardBasedOnClose + Measures bears' ability to push
BearsRewardBasedOnOpenClose) / 3 the price DOWN from the open
Low Price to the close price
Finally, the balance of market power indicator is calculated
as the difference between bulls’ and bears’ daily rewards. FIGURE 3: Reward based on the open-close
price.
BalanceOfMarketPower = BullsRewardDaily -
BearsRewardDaily

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:8 (18-32): Balance Of Power by Igor Livshin

FIGURE 4: BMP. Once charted, BMP tends

NASDAQ Daily
to make sharply defined reversals that 5250

CLOSING PRICE
help pinpoint support and resistance. 5000
4750
4500
(See sidebar “Calculating BMP in a
4250
spreadsheet” on page 30 for an
4000
example on how to calculate the
3750
BMP in Excel.)
3500
3250
USAGE 3000
For daily charts, I typically plot a 2750
14-day moving average of the 2500
balance of power indicator, though 2250 Positive
the number of periods varies 2000 divergence
depending on the nature of the 1750
market and the time frame. 1500
0 25 50 75 100 125 150 175 200 225 250 261
Unlike many indicators, BMP DAYS
typically does not meander at 14-day BALANCE OF MARKET POWER — BMP (14)
10
extreme levels but rather forms 8
v-shaped tops and bottoms. There- 6
4
fore, when BMP is getting close to a 2
0
well-established level where its tops -2
-4
or bottoms previously found -6
-8
resistance or support, the odds of a -10
0 25 50 75 100 125 150 175 200 225 250 261
price reversal are high. The price DAYS
and the BMP indicator can continue 95-day BALANCE OF MARKET POWER — BMP (95)
22 Broken BMP trendline
advancing or declining beyond these 15 confirmed by the longer BMP false trendline breakout
points, but the likelihood is much 10 trend. not confirmed by the longer
5 trend.
less and the risk is much higher. 0
Like many oscillators, B MP -5
-10
supports price divergence, trends, -15
and overbought–oversold levels. -22
0 25 50 75 100 125 150 175 200 225 250 261
BMP also helps to determine the DAYS
market trend. Figure 4 shows the

BEAR MARKET COMPARISON

PERCENT OF PEAK VALUE

100
DJIA in 1929–1935 bear market
FIGURE 5: NASDAQ VS.
DJIA. The loss in value of
80
the Nasdaq in 2000–01
and the DJIA of the 1929–
35 bear market.
60

40

20

Nasdaq in 2000–2001 bear market

0
0 50 100 150 200 250 300 350 375
WEEKS

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:8 (18-32): Balance Of Power by Igor Livshin

A B C D E F G H I J K L M
Bull’s Bear’s
Bull’s Bear’s Bull’s Bear’s score score
score score score score based on based on Raw 14-day
based on based on based on based on open to open to balance average
1 Date Open High Low Close open open close close close close of power BMP
2 9/7/98 100 101 99 100 0.5000 0.5000 0.5000 0.5000 0.0000 0.0000 0.0000
3 9/8/98 114 116 107 107 0.2222 0.7778 0.0000 1.0000 0.0000 0.7778 -0.7778
4 9/9/98 115 115 113 113 0.0000 1.0000 0.0000 1.0000 0.0000 1.0000 -1.0000
5 9/10/98 116 117 116 117 1.0000 0.0000 1.0000 0.0000 1.0000 0.0000 1.0000
6 9/11/98 115 122 113 118 0.7778 0.2222 0.5556 0.4444 0.3333 0.0000 0.3333
7 9/14/98 114 119 109 118 0.5000 0.5000 0.9000 0.1000 0.4000 0.0000 0.4000
8 9/15/98 118 122 112 115 0.4000 0.6000 0.3000 0.7000 0.0000 0.3000 -0.3000
9 9/16/98 113 114 108 112 0.1667 0.8333 0.6667 0.3333 0.0000 0.1667 -0.1667
10 9/17/98 109 119 108 110 0.9091 0.0909 0.1818 0.8182 0.0909 0.0000 0.0909
11 9/18/98 112 117 106 109 0.4545 0.5455 0.2727 0.7273 0.0000 0.2727 -0.2727
12 9/21/98 119 121 101 111 0.1000 0.9000 0.5000 0.5000 0.0000 0.4000 -0.4000
13 9/22/98 123 125 108 115 0.1176 0.8824 0.4118 0.5882 0.0000 0.4706 -0.4706
14 9/23/98 118 125 117 121 0.8750 0.1250 0.5000 0.5000 0.3750 0.0000 0.3750
15 9/24/98 130 130 116 127 0.0000 1.0000 0.7857 0.2143 0.0000 0.2143 -0.2143 -0.1002
16 9/25/98 120 141 119 132 0.9545 0.0455 0.5909 0.4091 0.5455 0.0000 0.5455 -0.0612
17 9/28/98 133 138 132 135 0.8333 0.1667 0.5000 0.5000 0.3333 0.0000 0.3333 0.0181
18 9/29/98 146 149 129 136 0.1500 0.8500 0.3500 0.6500 0.0000 0.5000 -0.5000 0.0538
19 9/30/98 139 147 134 135 0.6154 0.3846 0.0769 0.9231 0.0000 0.3077 -0.3077 -0.0396
20 10/1/98 139 139 128 131 0.0000 1.0000 0.2727 0.7273 0.0000 0.7273 -0.7273 -0.1153
21 10/2/98 134 136 125 126 0.1818 0.8182 0.0909 0.9091 0.0000 0.7273 -0.7273 -0.1958
22 10/5/98 119 121 117 121 0.5000 0.5000 1.0000 0.0000 0.5000 0.0000 0.5000 -0.1387
SIDEBAR FIGURE 1: BALANCE OF MARKET POWER (BMP). Computing the balance of market power isn’t complicated, but it does take up space!

CALCULATING BMP IN A SPREADSHEET

To compute balance of market power in
a spreadsheet, we’ve used Excel as an
example (Sidebar Figure 1). Most other
spreadsheets can translate Excel code
into their own formats. Begin by import-
ing the data (for plotting purposes), open,
high, low, and close as shown. Then,
place this code in cell F2 :

=(C2-B2)/(C2-D2)

Then enter the following code in these

cells :

G2=(B2-D2)/(C2-D2)
H2=(E2-D2)/(C2-D2)
I2=(C2-E2)/(C2-D2)
J2=IF(E2>B2,(E2-B2)/(C2-D2),0)
K2=IF(B2>E2,(B2-E2)/(C2-D2),0)
L2=(F2+H2+J2)/3-(G2+I2+K2)/3
M15=AVERAGE(L2:L15)

Copy all these cells down to the end of

the price data and you’re done. Sidebar SIDEBAR FIGURE 2: BMP AND THE S&C STANDARD PRICE SERIES. When BMP abruptly shifts from
Figure 2 displays a typical output, show- one far side of zero to another, it’s a clear sign that control has passed from bears to bulls or vice versa.
ing BMP’s leading behavior in the S&C This can presage extended periods of advance or decline.
standard price series.—I.L.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:8 (18-32): Balance Of Power by Igor Livshin

Nasdaq daily chart with an attached 14-day BMP (short-term)
and 95-day BMP (intermediate-term).
One of the most important properties of BMP is the level at
which it clusters its tops and bottoms. During the bull market,
its tops often reach the upper level and never reach the bottom
level. During the bear market, the picture is reversed.
As with other oscillators, BMP measures the velocity of the
price trend. The BMP trends are less sustainable than the price
trend — simply because it is more difficult to maintain the
same velocity of the trend than the trend itself. Thus, when the
BMP trend changes its direction, the price can continue to
advance but at a slower speed. Therefore, a change in the BMP
trend serves as a warning signal and should be confirmed by
a change in the price trend.
FOR FUN
Figure 5 compares the Dow Jones Industrial Average (DJIA)
of the market crash of 1929 against the Nasdaq losses between
March 2000 and March 2001. The chart shows the Nasdaq
managed to lose more than 60% of its value in 12 months,
which was 1.75 times faster than the DJIA declined in 1929.
In 1929, it took the DJIA 21 months to lose the same percentage
relative to its top value.
How about comparing the BMP indicator reading at the
bottom of 1929 with the BMP reading for the current Nasdaq
market? Figure 6 shows a weekly DJIA chart (1929–35) with
two calculated BMP indicators (measuring 14 weeks and 52
weeks, respectively).
The BMP is compressed between the two intersecting
trendlines† that form a descending triangle. Close to the apex,
BMP breaks up out of the pattern.
For the sake of comparison, Figure 7 shows the current
Nasdaq chart built under similar conditions. Unfortunately, I
can see nothing that resembles the bottom of 1929–35: Neither
price nor BMP trendlines break out, nor positive divergence,
and the BMP top does not reach a level seen during the bear

FIGURE 6: BREAKOUT. Once the DJIA WEEKLY, 1929 – 1935

1929 DJIA had descended to the 400
INDEX VALUE

point where the BMP broke out, it 375

signaled the recovery that fol- 350 The BMP (14 weeks) broken trend confirmed
lowed. 325 by the BMP (52 weeks).
300
275 BMP (14 weeks) reached the level here that has not
250 been seen during the current downtrend.
225
200 BMP (52 weeks) shows a positive
175 divergence. The price downtrend
150 is broken.
125
100
75
50
30
0 50 100 150 200 250 300 361
WEEKS
14-week BALANCE OF MARKET POWER – BMP (14)
10
7.5
5
2.5
0
-2.5
-5
-7.5
-10
0 50 100 150 200 250 300 361
WEEKS
52-week BALANCE OF MARKET POWER – BMP (52)
18
15
10
5
0
-5
-10
-15
-18 0 50 100 150 200 250 300 361
WEEKS

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:8 (18-32): Balance Of Power by Igor Livshin

FIGURE 7: BAD NEWS. If BMP is

NASDAQ WEEKLY
any guide, the Nasdaq has a 5500

INDEX VALUE
way to go before it hits a bot-
tom. 5000

4500
4000 Should BMP (52 weeks) return to
phase. the same level at the opposite
Further, BMP indicators 3500 side of the recent peak?
prompt one more question:
Will the major bottom 3000
happen when the B MP 2500
reaches the same extreme 2000
value on the downside
(about 15) as it reached on 1500
the upside? If the answer is 1000
yes, the Nasdaq still has quite
500
a way to go down. 100
0 50 100 150 200 250 300 326
WEEKS
Igor Livshin is a private 14-week BALANCE OF MARKET POWER – BMP (14)
10
trader. He can be reached by 7.5
phone at 312 822-6356 or by 5
e-mail at microworksoft 2.5
ware@yahoo.com. His 0
-2.5
website can be found at -5
microworkresearch.com/ -7.5
mo/index.html. -10
0 50 100 150 200 250 300 326
WEEKS
52-week BALANCE OF MARKET POWER – BMP (52)
RELATED READING 18
Pring, Martin J. [2001]. 15
“Analyzing Trends In 10
5
Momentum,” Technical
0
Analysis of STOCKS &
-5
COMMODITIES, Volume
-10
19: April.
-15
†See Traders’ Glossary for -18 0 50 100 150 200 250 300 326
definition WEEKS

Copyright (c) Technical Analysis Inc.

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