Demand Index

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Description

The Demand Index, developed by James Sibbet, combines price and volume in such a way that it is often a leading indicator of price change. The Demand Index calculations are too complex, however, for this text. The calculations require 21-column accounting paper to calculate manually.

MetaStock Pro uses a slight variation on the Sibbet's original Index so that the Index is displayed on a "normal" y-axis scale. The author's Index is plotted on a scale labeled +0 at the top, 1 in the middle, and -0 at the bottom. MetaStock Pro uses a scale from +100 to -100. Other than the difference in y-axis labeling, the indicator is calculated exactly as designed by its author.

Interpretation

There are six "rules" to the Demand Index:

1. A divergence between the Demand Index and the price trend suggests an approaching weakness in price.
2. One more rally to new highs usually follows an extreme peak in the Demand Index (the Index is performing as a leading indicator).
3. Higher prices with a lower Demand Index peak usually coincides with an important top (the Index is performing as a coincidental indicator).
4. The Demand Index penetrates the level of zero indicating a change in trend (the Index is performing as a lagging indicator).
5. When the Demand Index stays near the level of zero for any period of time, a weak price movement that will not last long is indicated.
6. A large long-term divergence between prices and the Demand Index indicates a major top or bottom.