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What is ‘Demand Index’? |SHORT NOTE|

DEMAND INDEX

Overview

The Demand Index combines price and volume in such a way that it is often a leading indicator of price change. The Demand Index was developed by James Sibbet.

Interpretation

Mr. Sibbet defined six “rules” for the Demand Index:

  • A divergence between the Demand Index and prices suggests an approaching weakness in price.
  • Prices often rally to new highs following an extreme peak in the Demand Index (the Index is performing as a leading indicator).
  • Higher prices with a lower Demand Index peak usually coincides with an important top (the Index is performing as a coincidental indicator).
  • The Demand Index penetrating the level of zero indicates a change in trend (the Index is performing as a lagging indicator).
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  • When the Demand Index stays near the level of zero for any length of time, it usually indicates a weak price movement that will not last long.
  • A large long-term divergence between prices and the Demand Index indicates a major top or bottom.

Example

The following chart shows Procter & Gamble and the Demand Index. A long-term bearish divergence occurred in 1992 as prices rose while the Demand Index fell. According to Sibbet, this indicates a major top.

Screenshot (110).png

Calculation

The Demand Index calculations are too complex for this short note (they require 21-columns of data). Sibbet’s original Index plotted the indicator on a scale labeled +0 at the top, 1 in the middle, and -0 at the bottom. Most computer software makes a minor modification to the indicator so it can be scaled on a normal scale.

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