Money Flow Dictates Market Moves

When we look at the raw mechanics of how markets move, it comes down to one thing: money flow. How and where money is moving dictates if stocks will ultimately go higher or lower.

Various factors affect money flow; some are quite simple and others are more complicated. But if we are tuned into it, we can, at the very least, understand market moves that are predicated on flows and make adjustments to our trading/investing plan at any moment.

Factors that influence money flow

Analyzing money flow is not too complicated, but some of the reasoning why it is rising or falling is a little complex. It really all comes down to liquidity.

Banks distribute funds, such as loans, in the very short-term (overnight) up to the for much longer timelines (years). If banks decide the risk is too high, they stop lending. With less liquidity out there, money flow slows down.

Cash flows from the Federal Reserve and Treasury often spill into the stock market and other asset classes via reversal repo (purchases). When they slow down their buying, market liquidity tightens up and stock prices move erratically.

Both situations tend to create a volatile situation. And we all know what happens with more volatility in the markets: Traders and investors get nervous. (Remember that volatility is not a bearish indicator. It just means that the price range is expanding.)

How to analyze it

I turn to a handful of indicators to analyze money flow: Chaikin money flow, volume oscillators, on-balance volume, and momentum indicators. If I see volume increasing on high turnover, I know stocks will rise in price. If I see stocks rising on lower turnover, I know they are vulnerable to selling.

Money flows into and out of markets on a constant basis. Money flow tells you when buyers are rushing in – or hitting the gas.

Bob Lang is a top technical analyst and expert options trader who teaches people how to successfully trade options for income. He is a sought-after mentor and teacher, published author, go-to chartist for Jim Cramer and popular speaker at industry conferences and tradeshows. This post originally appeared on the Explosive Options website.