Key insights
- The author posits that supply-driven markets exhibit higher volatility and wider trading ranges, favoring discretionary trading due to increased liquidity and volatility. They suggest that supply-driven momentum can override market depth, influencing price action even with increasing sell orders. This implies a potential short-term negative impact on US equities due to increased volatility and the challenges of predicting market movements based solely on supply dynamics.
Typing this to articulate some of my thoughts.
Supply-driven markets are said to move the price action more violently than demand-driven ones. When the supply of a stock is increased or promoters sell deliberately and rumors of further damage swirl, the trend shoots down.
This makes the supply-driven markets more volatile with wider channels, making profit targets bigger. The crux of this is that the two most important aspects of trading - liquidity and volatility - are housed by supply-driven incentives. No less than implying that discretionary, not systematic, trading matters more often than not, fortunately or unfortunately.
Anyway, I also think this has a first-order relation to the absorption of orders by market makers. Supply-driven momentum moves price action despite the conditions of market depth. For example, increasing (open) sell orders can still drive prices up by supply-driven absorption.
I'm looking for what you think. Here for more opinions/criticism of what I said. And do you have a method for judging supply-driven predictions, analyzing market depth, or both?