After casting his vote for me, one of my favorite all time reads and radio/television sensation Scott Bleier told me to cut out the point and figure crap.  This was in reference to the TPO and volume profile charts I have been posting for the S&P futures.  Seeing as Scott is arguably one of the most seasoned pros on this site, it’s easy to assume a few others are unfamiliar with TPO charts and how they can be interpreted to glean understanding of a contract’s price action.

First let me very quickly cover the P&F chart.  If you desire more background on the charting method, I’ve linked to two detailed sources at the end of this post.

P&F differentiates from most chart styles by not plotting price against time.  Instead it uses Xs and Os to delineate upward and downward movement respectively.  One goal is spotting breakouts and breakdowns.  Below I’ve marked up the SPY chart.  Notice all of 2012 is contained within five strands of Xs and Os.  Writing about this chart every morning would be grounds for banishment, no doubt:

TPO charts, and more importantly the volume profile, give us much more actionable data.  TPO stand for time price opportunity and each letter (usually) represents 30 minutes of trading.  As the session progresses, the TPOs build up and take shape.  Remember bell curves?  They show up all the time in a balanced market.  My write ups cover the e-mini S&P future contract.  It’s the most traded financial instrument in the world and is derived from the price of the S&P 500 index.

The more time we spend trading at a specific level, the more TPOs build up, and it tells us the market has “accepted” a price as reasonable and buyers and sellers both find the price as reasonable, balanced.  Balance is good, but imbalance and price discovery are where the opportunity to bank coin reside.  Last Thursday was an example of price discovery which led to the gap fill.  You can see the before and after in my posts here and here.

As volume data became more raw, more pure, we began plotting the volume at price to build similar imagery as the TPOs had in the past.  Most current users of this type of charting consider tracking the volume to be more relevant and actionable.  I agree.  If we know where the most volume has traded, we can watch that level and see how the market reacts when we reach it.  If we blow through the level, something has changed and the participants no longer agree the price is fair.

I could continue on, but let’s instead look at Friday’s auction and what it tells us.  First, I very clearly see from the tight range that there wasn’t much action on Friday and the market found balance.  The purple box I plot is the range where 70% of the transactions occurred for the day, using volume at price.  It’s called the value area and people make a living trading around these levels alone.  We closed right near the middle of the value area, but not before the bears attempted an afternoon push lower.  Buyers showed up and price quickly returned to the midpoint.  Overall Friday was a balanced day of market stabilization:

In my next post I’ll cover price areas of interest going into Monday’s trade.  Levels where we could expect the market to pause or explore.

PnF Links:

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:pnf_charts

http://en.wikipedia.org/wiki/Point_and_figure_chart