Invest and Trade Profitably with Jon Johnson

In discussing some recent plays you state that money flow is way out ahead of price. How do you determine this?

August 30, 2000

There are many measures of money flow calculated by several different services. Bloomberg has a proprietary measure that subscribers can take advantage of for about $1500 per month (along with a TON of other features). There are also many places on the web where you can chart money flow measures. Others such as TC2000 have their own versions (TC2000 calls theirs ‘moneystream’). In theory and in its simplest form, money flow is a calculation of net dollars flowing into or out of a stock.

It is not necessarily a primary indicator, but it is a very good supporting tool or secondary indicator. If the pattern is good and price/volume action is good, a solid money flow indication is a positive. We use it in two ways.

First, we look for divergences, both positive and negative. Positive divergences occur when money flow at the current price is higher than money flow at an earlier, higher price. In other words, there is more money flowing into the stock here at the lower price than there was at a higher price. That indicates more buying interest here at this price than there was at a higher price, an indication of a better move to come. A negative divergence would be where money flow is lower at the current price than it was at a lower price.

Second we look for money flow to be leading the stock in one direction or the other. If the pattern and price/volume action are solid, if we see money flow running higher and higher even as the stock moves laterally or otherwise consolidates, that is a positive. Think of it as pressure building up: money is moving into the stock as it moves laterally. Eventually that pressure builds up and the stock pops higher. On the downside, if money flow is plunging and the stock is trying to hold support, that is an indication that support may not hold.

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