Pro Gap Into Month End

Nasdaq futures were thrown out of balance overnight after the Bank of Japan announced they were expanding their massive stimulus package.  The reaction was large enough to put the index to new swing highs meaning participants are coming to market this morning at prices dramatically different from the closing bell. The volume and range on the globex session are beyond normal as you might expect putting us in pro gap territory.

On the economic calendar for today we have Chicago Purchasing Manager at 9:45am and U. of Michigan Confidence stats at 9:55.  We are also in the thick of earnings season as the month-end trade takes us into the weekend.

Prices at the open will be trading levels unseen since March of 2000.  Given the lack of price history available, I need to work using available support levels and measured move targets.  I have noted the measured moves and support levels I will be observing on the following volume profile mash up chart:

10312014_intterm_NQ

Active Time Frame Identified

Nasdaq futures started to drift lower overnight shortly after we heard data on German unemployment early this morning.  The resulting range on the entire session is still within the 1st standard deviation of normal although volume picked up to levels we have not seen since the fast down markets of a few weeks ago.  At 8:30am the US quarterly GDP stats were released along with jobless claims and personal consumption.  GDP was better than expected in the third quarter and the other data were worse than expected and the net reaction was an aggressive responsive buy taking us nearly to the midpoint of the overnight session (4064).

The overnight session managed to press into Monday’s range before finding responsive buyers.  It will be interesting to see in the cash trade hours whether a retest of this overnight low occurs and how it is treated.  Since the gap higher Tuesday morning I have noted that we are provided with a unique opportunity to gauge demand.  How the market trades relative to this gap, mainly if buyers sharply reject us from Monday’s clean balance, will be a clear clue of short term sentiment.

I present only the volume profile mashup chart today.  Notice how well recent action has adhered to the price levels noted on the chart.  This is a clue that the intermediate term and short term time frame participants are the primary drivers of market rotation.  If instead we begin seeing large moves which ignore or steamroll these levels, then we know an even higher time frame is participating and it makes sense to step out of their way.  I made no adjustments to these levels from yesterday, they are still key reference points as we go about trade:

10302014_intterm_NQ

The Tail End of The Auction

There comes a point in any auction where higher prices cut off activity and more ‘noise’ must be introduced to give the perception of a continuing auction.  In a traditional one-way auction, say for a vintage automobile, the auctioneer will begin repeating words or adding details or pointing around manically to create an illusion of activity when price has actually stalled.  In a two-way auction like the futures we start to see overlapping value, indecisive doji candles, range compression, and eventually value compression or rejection.

The last three sessions in the Nasdaq did not quite demonstrate these traits yet.  Instead we are seeing a smooth migration higher in value.  As we approach US cash trade prices are set to gap higher.  Some of the gains has been paired back after a weaker than expected Durable Goods Orders (Sep) number came out.  However prices are still trading outside of yesterday’s range which creates an opportunity to clearly observe demand.

As we trade early on there will be clues as to whether the auction needs to continue exploring higher to find sellers or whether we have arrived at a location where sellers are motivated and present and willing to introduce enough supply to the market to overwhelm demand. First, the open type—is it an aggressive selling response from the minute the bell rings?  Or do we see an open auction with two-timeframe participation?  Next, do we trade into yesterday’s range?  Or is demand so strong prices cannot even return to the prior range?  Then, if we trade the range do we close the overnight gap, the VPOC, VAL?  And so on, we go, down the line, always observing the nature by which these events take place if in fact they do.

A unique opportunity to observe demand today, you see?

Keep in mind we have Consumer Confidence at 10am, MBA Mortgage Applications premarket tomorrow at 7am, Facebook earnings AMC, and tomorrow is a big Fed day-type afternoon which at some point is likely to produce a pause in the market.  At least, that is the expectation.

The second leg lower to follow the big, motivated knife lower in the Nasdaq came into question on 10/21 when we started the day with prices gap higher well above the midpoint of the move.  There are many useful Fibonacci numbers, I suppose, but the midpoint is my favorite checkpoint.  If sellers were truly motivated, then we should not have been trading back up through the mid.  Now the inverse is true, we have a midpoint to this up-V, it can be seen as the thick blue line on the below chart.  It is far away, as you might imagine, after such a large move.  This risk now, to longs, is this distance, as revision now begins to favor the seller.  However, auction theory, as noted in the lesson above, suggests we can be cautiously bullish.  See the below daily chart which has two air pockets and a midpoint noted:

10282014_daily_NQ

Bringing our eyes a bit closer, I have noted the price levels I will be observing today on the following volume profile mashup chart:

10282014_intterm_NQ

Big Picture Context Update for a Busy Week

The economic docket features several heavy hitting events for the week ahead.  Starting with today at 10:30am when the ECB announces Covered Bond Purchase plan.  We also have Dallas Fed at the same time.  Premarket Tuesday we have Durable Goods Orders being announced followed by Consumer Confidence at 10am.  Come Wednesday afternoon we will be hearing several data points from the Fed including Pace of several asset purchasing programs, QE3 Pace, and the FOMC rate decision.  Thursday we hear Q3 GDP out of USA.  With all of that in mind, it behooves the speculator to turn their attention to the real information by observing our recent price action and volume behavior.

First let’s return to a weekly chart of the actual Nasdaq Composite.  Most of our charting of the Nasdaq features the front-month future contract, however the index itself often offers interesting and relevant action points.  Before volatility came into the market we saw price grind up and through the open gap left behind 14 year ago during the dot com bubble.  Once filling the void, prices printed a series of doji-type candles which signal indecision.  The final doji was long-legged then we began heading lower.  There was a responsive bid during most of the process which can be seen as tails on the candles or ‘shadows’.  However, three weeks ago we printed a large red candle down that closed on the lows.  Then two weeks ago we print a massive hammer candle, then last week a huge green candle.  The question now is whether the hammer-plus-confirmation allows the long term uptrend to continue.  As you can see price has come back into a prior area of resistance.  I suspect we see the market struggle to go higher at the least.  What bulls do not want is a fast rejection down—especially one that gives back 50% or more of last week’s gains.  I have noted these observations below:

10272014_weekly_NQ

The most recent and key takeaway from the above chart is that it is long-term bullish and the recent action printed a hammer reversal.  Thus, now coming to the daily chart, we know we want to know where the midpoint of that move is and how the volume structure looks between current prices and the mid.  I have noted the mid below as a solid blue line.  Above there are two distinct valleys where volume drops off significantly.  These can be fast regions for price action.  If instead price struggles to traverse these zones that would be an indication that buyers are sustaining control on the day-to-day timeframe.  I have noted the brackets around these low volume regions and other observations on the below daily chart of the December /NQ future contract:

10272014_daily_NQ

Finally, I have noted the key price levels I will be observing short term on the following volume profile mash up chart:

10272014_intterm_NQ

Ye Olde Check Back

Nasdaq futures have been chopping about on normal volume overnight as we head into Friday’s trade.  The NYC Ebola case was confirmed and the equity index is demonstrating sensitivity to the news.  We have New Home Sales data coming out at 10am and an otherwise quiet economic calendar.  Some news about ECB bank stress tests is hitting the wires are we approach cash trade and it is causing a bit of a stir in the futures.

Shifting attention away from the daily bar chart, let’s look at the monthly volume profile print.  A quick note on the daily bar chart (not pictured) is we have seen signs of responsive selling both Wednesday and yesterday.  Whether they can convert to imitative selling is the question on my mind today.  Back to the monthly volume profile, we can see price testing the uppermost value threshold we printed during September.  My initial expectation is for participants to reject this value area, however if they cannot then a test of the VPOC then the other side become likely.  See below:

10242014_monthly_NQ

Yesterday’s profile print was quite the odd shape.  It had the marquee P-shaped short squeeze look for most of the session, then we popped out of it to the upside.  At this point a well-timed Ebola case hit the wires and we saw a sharp responsive sale.  The result is a thin tailed balance of sorts which we are set to open inside of.  We have left behind 4 NVPOCs and 2 open gaps on this move up, we are seeing signs of responsive sellers, and the week is coming to a close.  My primary expectation is for a choppy session with a downward bias as profit taking into the weekend causes sell flow.  I have highlighted the key levels I will be observing on the following volume profile mash up chart:

10242014_intterm_NQ

Enter Pro Gap

Nasdaq futures are up over 25 points ahead of cash open on a session which featured two major up rotations, one near 3:30am when Europe opened and another around 7am when early earnings announcements started coming out.  Some of the buy flow is being attributed to better than expected earnings from CAT, who also saw a sizeable stock buyback occur.  8:30am we had Initial and Continuing Claims stats which came out in line with expectation.  We have house price index at 9am, leading indicators at 10am, and then Natural Gas Inventories at 10:30am.

The Nasdaq is gapping just above the prior day range, and the size of the gap is what some consider ‘pro’ meaning an attempt to fade it is likely a trade only accomplished with very deep, professional pockets.  The risk to such a trade is the volume pocket just above which could act as an accelerator if prices are not rejected away from the vacuum.  The open will be vital to today’s trade.  Do responsive sellers show up and dominate?  Or do we see a dominant buy flow which sweeps us up into this pocket?  See below:

10232014_daily_NQ

The one trait sellers did not present yesterday which had been rather obvious during other down days was the strong volume and big negative cumulative delta.  Instead we compressed yesterday.  I have been keen on this prior balance zone formed to start October.  When it formed to start the month I thought we would leave it to the upside.  Instead we explored lower, found a sharp responsive buyer, and now here we are revisiting this zone.  The MCVPOC held as resistance yesterday but we might explore through the region today to the other side (above).  We also have the ‘LVN Separator’ at 3937.25 below as a key pivot should sellers price reject out of this area.  These very important levels, as well as other vital price levels are noted below on the following volume profile mash up chart:

10232014_intterm_NQ

Returning To A Well-Defined Auction

Equity futures are flat overnight after a quiet session of digesting yesterday’s move.  As we approach US trade the CPI stats are out and roughly in line while some traders may have expected a bit softer of a number.  This is lending a bit of strength to the US dollar early on and the initial reaction in Nasdaq futures is muted.  Buyers managed to extend yesterday’s progress a bit during the globex session before finding responsive sellers who neutralized the session.

Below is a daily chart of the Nasdaq futures where we can see just how sharp of a rejection buyers created with their response to the discounted prices.  I noted the midpoint of the down move yesterday which is at 3902.375 and I combined that with the midpoint of the current up move (which is still in development) at 3832 to highlight a broad ‘pivot’ area.  Whoever controls this zone has an opportunity to control the long term timeframe.  There is also a very well defined LVN above current prices as we press into the scene of the breakdown.  My expectation is for the market to find responsive sellers at some point today:

10222014_daily_NQ

If you look at the nearest profile to the left of our current prices, you can see our ‘template day’ or the day we are trading relative to is thin north of 3979 until about 4014.  If this was our only observation we might consider the risk of a fast slide up this zone.  However, there is a larger balance in play up here.  It is the red and green micro composite on the left side of the screen.  It tells the story regarding the last auction we held at these prices.  I have carefully selected the price levels I will be observing as we enter this zone (and beyond) on the following volume profile mash up chart:

10222014_intterm_NQ

Strong Premarket Buy Flow Calls Predominant Theory into Question

Four hours of continuous buy flow impulsively ripped through the globex marketplace this morning.  The move is being attributed to an ECB corporate bond buying plan according to a few media outlets.  The ‘why’ of a move is often the focus of media outlets, but we focus on the ‘how’.  We know for certain a dominant buyer overnight rejected us away from yesterday’s prices.  This puts the Nasdaq out of balance as we approach cash open.  Our next job is to assess how RTH participants react to this new development.

There is a general consensus of skepticism surrounding the market bounce currently taking place.  The dip lower that precluded our current market bounce was fast and spanned a wide price range.  This leads many to suspect any bounce will eventually roll over, likely before attaining new highs.

That theory becomes a bit thorny as we enter today’s session.  We are now pushing into a zone where the market is likely to find sellers, however if they instead back off the tape we have a high velocity move underway which could carry us to new highs.

Buyers were impressive yesterday.  The session started with a strong push higher, lingered for the rest of the day, and finally made another thrust up into the bell.  Looking at the daily chart below, we can see prices probing a prior area of support which also features a high volume node.  It appears we will ‘test through’ this zone to the LVN on the other side before determining if this zone will be converted into resistance.  On the whole, this is the first real pullback since this move started.  I have noted the motivated move lower, its midpoint, and a few other observations below:

10212014_daily_NQ

We always observe the midpoint of a major move in the marketplace.  Major is relative as the markets produce similar patterns on multiple scales and timeframes.  This is why you hear the word fractal thrown around in these parts.  Put simply, the mid is a simple number to calculate and observe which makes it easy to run statistical analysis on, build trade ideas on, and build executing algorithms upon.

On the shorter 15-minute timeframe we can see the market is returning to its normal function of balance-discovery in a quest to determine value.  The recent low printed a clean balance volume profile before we began exploring upward.  Now price is probing into the volume profile printed just after we left a 7-day balance and only moments before we printed the fastest leg of the downward move.  This is our template day of volume-at-price to observe for today’s trade.  I have highlighted the key price levels I will be observing on the following chart:

10212014_intterm_NQ

Clear Guideposts Emerge

Nasdaq futures have seen a slow in pace as we enter the new week.  Last week (OPEX) featured the highest volumes both in regular session and globex that we have seen in several years.  As  we embark on a new month of risk, activity has slowed.  Since opening for trade Sunday afternoon the price of the Nasdaq front month (December) futures contract has traded inside of Friday’s range suggesting overnight/weekend participants accept Friday’s range as balance.  The session kicked off with a low volume rally which slowly evaporated through the duration of the evening.  The economic calendar was quiet overnight.  We have China GDP numbers out this evening and USA CPI on the docket for Wednesday premarket.  Earnings season is ramping up throughout the week as well.

The market became a bit illiquid last week as participants aggressively sold equities.  Price action ‘broke loose’ which is a phrase we often use to describe the price action following a break from compression.  In these conditions, the quest for value and balance go out of whack and we are offered a rare opportunity to see real human emotion play out in the tape, often fear.  The event leaves a ripple in our environment and is likely to continue affecting the behavior of prices going forward.  Remember, price has memory.  Fortunately, the action managed to form brackets last week—guideposts we can use to assess price and volume going forward to determine if either the buyer or seller is gaining control.  I have noted these brackets on the following daily chart.  Note how prior zones of support and resistance are transformed into their counterparts:

10202014_daily_NQ

Given the progress of sellers over the last 1-2 weeks, the micro composite from Wednesday/Thursday, and especially given the amount of volume which came in on the downward action, my short term bias is medium bearish.  You can see three volume profile print-types: the large composite on the right (months of volume-at-price), the red and green ‘micro composite’ facing the opposite way of all the others, and the daily volume profiles.  Each tells me a different story.  I have noted the price levels I will be observing as opportunities on the following 15-minute volume profile chart.

10202014_intterm_NQ

The Check Back

Markets operate on fractals which occur on all timeframes and they look the same only the scales can be much larger.  One of the predominant characteristics of the market is to ‘check back’ or revisit a zone where a significant event occurred.  Once the Nasdaq broke loose to the downside its first stop was the major resistance zone we printed back in March 2014.  As we approach US cash trade, we are seeing some follow through from buyers who showed up at this level.  Volumes are still running on the high end in the globex session, but, as you might imagine, they are lower as we head higher.

Giving boost to index prices is speculation of additional stimulus according to many of the media outlets.  However it makes more sense to attribute this move to the oversold conditions which have persisted in the market since last week.  The issue we have is how long the market stayed oversold.  This type of long duration oversold event often precludes a shift in sentiment overall.

Investors are looking for this round of earnings to build confidence in the marketplace and thus far results have been mixed.  The earning season is only beginning however.  We have U of M Confidence numbers at 10am and an otherwise quiet economic calendar.  Also, although it might seem a bit trite, I continue to monitor the trade in NFLX after its jaw dropping 20% move to see how the market digests it.

I have noted the ‘check back’ on the following chart, and also where we are likely to run into some sellers.  These are very broad brush strokes which we can refine on a shorter timeframe, and then refine on a shorter timeframe, and then refine on a shorter timeframe to day trade.  However, stock traders and swing traders/investors should be keen on these zones:

10172014_daily_NQ

We are currently trading on the upper edge of yesterday’s range and it will be important to observe early on if buyers reject yesterday’s range.  If they do, we are likely to explore higher which puts prices into an air pocket which might lend to upside acceleration, especially if shorts begin to cover.  You will also notice the 2-day balance we formed on the lows featuring a clean taper bottom and a centralized VPOC—lovely symmetry.  I have also noted the price levels I will be observing:

10172014_intterm_NQ

Pro Gap Into Month End

Nasdaq futures were thrown out of balance overnight after the Bank of Japan announced they were expanding their massive stimulus package.  The reaction was large enough to put the index to new swing highs meaning participants are coming to market this morning at prices dramatically different from the closing bell. The volume and range on the globex session are beyond normal as you might expect putting us in pro gap territory.

On the economic calendar for today we have Chicago Purchasing Manager at 9:45am and U. of Michigan Confidence stats at 9:55.  We are also in the thick of earnings season as the month-end trade takes us into the weekend.

Prices at the open will be trading levels unseen since March of 2000.  Given the lack of price history available, I need to work using available support levels and measured move targets.  I have noted the measured moves and support levels I will be observing on the following volume profile mash up chart:

10312014_intterm_NQ

Active Time Frame Identified

Nasdaq futures started to drift lower overnight shortly after we heard data on German unemployment early this morning.  The resulting range on the entire session is still within the 1st standard deviation of normal although volume picked up to levels we have not seen since the fast down markets of a few weeks ago.  At 8:30am the US quarterly GDP stats were released along with jobless claims and personal consumption.  GDP was better than expected in the third quarter and the other data were worse than expected and the net reaction was an aggressive responsive buy taking us nearly to the midpoint of the overnight session (4064).

The overnight session managed to press into Monday’s range before finding responsive buyers.  It will be interesting to see in the cash trade hours whether a retest of this overnight low occurs and how it is treated.  Since the gap higher Tuesday morning I have noted that we are provided with a unique opportunity to gauge demand.  How the market trades relative to this gap, mainly if buyers sharply reject us from Monday’s clean balance, will be a clear clue of short term sentiment.

I present only the volume profile mashup chart today.  Notice how well recent action has adhered to the price levels noted on the chart.  This is a clue that the intermediate term and short term time frame participants are the primary drivers of market rotation.  If instead we begin seeing large moves which ignore or steamroll these levels, then we know an even higher time frame is participating and it makes sense to step out of their way.  I made no adjustments to these levels from yesterday, they are still key reference points as we go about trade:

10302014_intterm_NQ

The Tail End of The Auction

There comes a point in any auction where higher prices cut off activity and more ‘noise’ must be introduced to give the perception of a continuing auction.  In a traditional one-way auction, say for a vintage automobile, the auctioneer will begin repeating words or adding details or pointing around manically to create an illusion of activity when price has actually stalled.  In a two-way auction like the futures we start to see overlapping value, indecisive doji candles, range compression, and eventually value compression or rejection.

The last three sessions in the Nasdaq did not quite demonstrate these traits yet.  Instead we are seeing a smooth migration higher in value.  As we approach US cash trade prices are set to gap higher.  Some of the gains has been paired back after a weaker than expected Durable Goods Orders (Sep) number came out.  However prices are still trading outside of yesterday’s range which creates an opportunity to clearly observe demand.

As we trade early on there will be clues as to whether the auction needs to continue exploring higher to find sellers or whether we have arrived at a location where sellers are motivated and present and willing to introduce enough supply to the market to overwhelm demand. First, the open type—is it an aggressive selling response from the minute the bell rings?  Or do we see an open auction with two-timeframe participation?  Next, do we trade into yesterday’s range?  Or is demand so strong prices cannot even return to the prior range?  Then, if we trade the range do we close the overnight gap, the VPOC, VAL?  And so on, we go, down the line, always observing the nature by which these events take place if in fact they do.

A unique opportunity to observe demand today, you see?

Keep in mind we have Consumer Confidence at 10am, MBA Mortgage Applications premarket tomorrow at 7am, Facebook earnings AMC, and tomorrow is a big Fed day-type afternoon which at some point is likely to produce a pause in the market.  At least, that is the expectation.

The second leg lower to follow the big, motivated knife lower in the Nasdaq came into question on 10/21 when we started the day with prices gap higher well above the midpoint of the move.  There are many useful Fibonacci numbers, I suppose, but the midpoint is my favorite checkpoint.  If sellers were truly motivated, then we should not have been trading back up through the mid.  Now the inverse is true, we have a midpoint to this up-V, it can be seen as the thick blue line on the below chart.  It is far away, as you might imagine, after such a large move.  This risk now, to longs, is this distance, as revision now begins to favor the seller.  However, auction theory, as noted in the lesson above, suggests we can be cautiously bullish.  See the below daily chart which has two air pockets and a midpoint noted:

10282014_daily_NQ

Bringing our eyes a bit closer, I have noted the price levels I will be observing today on the following volume profile mashup chart:

10282014_intterm_NQ

Big Picture Context Update for a Busy Week

The economic docket features several heavy hitting events for the week ahead.  Starting with today at 10:30am when the ECB announces Covered Bond Purchase plan.  We also have Dallas Fed at the same time.  Premarket Tuesday we have Durable Goods Orders being announced followed by Consumer Confidence at 10am.  Come Wednesday afternoon we will be hearing several data points from the Fed including Pace of several asset purchasing programs, QE3 Pace, and the FOMC rate decision.  Thursday we hear Q3 GDP out of USA.  With all of that in mind, it behooves the speculator to turn their attention to the real information by observing our recent price action and volume behavior.

First let’s return to a weekly chart of the actual Nasdaq Composite.  Most of our charting of the Nasdaq features the front-month future contract, however the index itself often offers interesting and relevant action points.  Before volatility came into the market we saw price grind up and through the open gap left behind 14 year ago during the dot com bubble.  Once filling the void, prices printed a series of doji-type candles which signal indecision.  The final doji was long-legged then we began heading lower.  There was a responsive bid during most of the process which can be seen as tails on the candles or ‘shadows’.  However, three weeks ago we printed a large red candle down that closed on the lows.  Then two weeks ago we print a massive hammer candle, then last week a huge green candle.  The question now is whether the hammer-plus-confirmation allows the long term uptrend to continue.  As you can see price has come back into a prior area of resistance.  I suspect we see the market struggle to go higher at the least.  What bulls do not want is a fast rejection down—especially one that gives back 50% or more of last week’s gains.  I have noted these observations below:

10272014_weekly_NQ

The most recent and key takeaway from the above chart is that it is long-term bullish and the recent action printed a hammer reversal.  Thus, now coming to the daily chart, we know we want to know where the midpoint of that move is and how the volume structure looks between current prices and the mid.  I have noted the mid below as a solid blue line.  Above there are two distinct valleys where volume drops off significantly.  These can be fast regions for price action.  If instead price struggles to traverse these zones that would be an indication that buyers are sustaining control on the day-to-day timeframe.  I have noted the brackets around these low volume regions and other observations on the below daily chart of the December /NQ future contract:

10272014_daily_NQ

Finally, I have noted the key price levels I will be observing short term on the following volume profile mash up chart:

10272014_intterm_NQ

Ye Olde Check Back

Nasdaq futures have been chopping about on normal volume overnight as we head into Friday’s trade.  The NYC Ebola case was confirmed and the equity index is demonstrating sensitivity to the news.  We have New Home Sales data coming out at 10am and an otherwise quiet economic calendar.  Some news about ECB bank stress tests is hitting the wires are we approach cash trade and it is causing a bit of a stir in the futures.

Shifting attention away from the daily bar chart, let’s look at the monthly volume profile print.  A quick note on the daily bar chart (not pictured) is we have seen signs of responsive selling both Wednesday and yesterday.  Whether they can convert to imitative selling is the question on my mind today.  Back to the monthly volume profile, we can see price testing the uppermost value threshold we printed during September.  My initial expectation is for participants to reject this value area, however if they cannot then a test of the VPOC then the other side become likely.  See below:

10242014_monthly_NQ

Yesterday’s profile print was quite the odd shape.  It had the marquee P-shaped short squeeze look for most of the session, then we popped out of it to the upside.  At this point a well-timed Ebola case hit the wires and we saw a sharp responsive sale.  The result is a thin tailed balance of sorts which we are set to open inside of.  We have left behind 4 NVPOCs and 2 open gaps on this move up, we are seeing signs of responsive sellers, and the week is coming to a close.  My primary expectation is for a choppy session with a downward bias as profit taking into the weekend causes sell flow.  I have highlighted the key levels I will be observing on the following volume profile mash up chart:

10242014_intterm_NQ

Enter Pro Gap

Nasdaq futures are up over 25 points ahead of cash open on a session which featured two major up rotations, one near 3:30am when Europe opened and another around 7am when early earnings announcements started coming out.  Some of the buy flow is being attributed to better than expected earnings from CAT, who also saw a sizeable stock buyback occur.  8:30am we had Initial and Continuing Claims stats which came out in line with expectation.  We have house price index at 9am, leading indicators at 10am, and then Natural Gas Inventories at 10:30am.

The Nasdaq is gapping just above the prior day range, and the size of the gap is what some consider ‘pro’ meaning an attempt to fade it is likely a trade only accomplished with very deep, professional pockets.  The risk to such a trade is the volume pocket just above which could act as an accelerator if prices are not rejected away from the vacuum.  The open will be vital to today’s trade.  Do responsive sellers show up and dominate?  Or do we see a dominant buy flow which sweeps us up into this pocket?  See below:

10232014_daily_NQ

The one trait sellers did not present yesterday which had been rather obvious during other down days was the strong volume and big negative cumulative delta.  Instead we compressed yesterday.  I have been keen on this prior balance zone formed to start October.  When it formed to start the month I thought we would leave it to the upside.  Instead we explored lower, found a sharp responsive buyer, and now here we are revisiting this zone.  The MCVPOC held as resistance yesterday but we might explore through the region today to the other side (above).  We also have the ‘LVN Separator’ at 3937.25 below as a key pivot should sellers price reject out of this area.  These very important levels, as well as other vital price levels are noted below on the following volume profile mash up chart:

10232014_intterm_NQ

Returning To A Well-Defined Auction

Equity futures are flat overnight after a quiet session of digesting yesterday’s move.  As we approach US trade the CPI stats are out and roughly in line while some traders may have expected a bit softer of a number.  This is lending a bit of strength to the US dollar early on and the initial reaction in Nasdaq futures is muted.  Buyers managed to extend yesterday’s progress a bit during the globex session before finding responsive sellers who neutralized the session.

Below is a daily chart of the Nasdaq futures where we can see just how sharp of a rejection buyers created with their response to the discounted prices.  I noted the midpoint of the down move yesterday which is at 3902.375 and I combined that with the midpoint of the current up move (which is still in development) at 3832 to highlight a broad ‘pivot’ area.  Whoever controls this zone has an opportunity to control the long term timeframe.  There is also a very well defined LVN above current prices as we press into the scene of the breakdown.  My expectation is for the market to find responsive sellers at some point today:

10222014_daily_NQ

If you look at the nearest profile to the left of our current prices, you can see our ‘template day’ or the day we are trading relative to is thin north of 3979 until about 4014.  If this was our only observation we might consider the risk of a fast slide up this zone.  However, there is a larger balance in play up here.  It is the red and green micro composite on the left side of the screen.  It tells the story regarding the last auction we held at these prices.  I have carefully selected the price levels I will be observing as we enter this zone (and beyond) on the following volume profile mash up chart:

10222014_intterm_NQ

Strong Premarket Buy Flow Calls Predominant Theory into Question

Four hours of continuous buy flow impulsively ripped through the globex marketplace this morning.  The move is being attributed to an ECB corporate bond buying plan according to a few media outlets.  The ‘why’ of a move is often the focus of media outlets, but we focus on the ‘how’.  We know for certain a dominant buyer overnight rejected us away from yesterday’s prices.  This puts the Nasdaq out of balance as we approach cash open.  Our next job is to assess how RTH participants react to this new development.

There is a general consensus of skepticism surrounding the market bounce currently taking place.  The dip lower that precluded our current market bounce was fast and spanned a wide price range.  This leads many to suspect any bounce will eventually roll over, likely before attaining new highs.

That theory becomes a bit thorny as we enter today’s session.  We are now pushing into a zone where the market is likely to find sellers, however if they instead back off the tape we have a high velocity move underway which could carry us to new highs.

Buyers were impressive yesterday.  The session started with a strong push higher, lingered for the rest of the day, and finally made another thrust up into the bell.  Looking at the daily chart below, we can see prices probing a prior area of support which also features a high volume node.  It appears we will ‘test through’ this zone to the LVN on the other side before determining if this zone will be converted into resistance.  On the whole, this is the first real pullback since this move started.  I have noted the motivated move lower, its midpoint, and a few other observations below:

10212014_daily_NQ

We always observe the midpoint of a major move in the marketplace.  Major is relative as the markets produce similar patterns on multiple scales and timeframes.  This is why you hear the word fractal thrown around in these parts.  Put simply, the mid is a simple number to calculate and observe which makes it easy to run statistical analysis on, build trade ideas on, and build executing algorithms upon.

On the shorter 15-minute timeframe we can see the market is returning to its normal function of balance-discovery in a quest to determine value.  The recent low printed a clean balance volume profile before we began exploring upward.  Now price is probing into the volume profile printed just after we left a 7-day balance and only moments before we printed the fastest leg of the downward move.  This is our template day of volume-at-price to observe for today’s trade.  I have highlighted the key price levels I will be observing on the following chart:

10212014_intterm_NQ

Clear Guideposts Emerge

Nasdaq futures have seen a slow in pace as we enter the new week.  Last week (OPEX) featured the highest volumes both in regular session and globex that we have seen in several years.  As  we embark on a new month of risk, activity has slowed.  Since opening for trade Sunday afternoon the price of the Nasdaq front month (December) futures contract has traded inside of Friday’s range suggesting overnight/weekend participants accept Friday’s range as balance.  The session kicked off with a low volume rally which slowly evaporated through the duration of the evening.  The economic calendar was quiet overnight.  We have China GDP numbers out this evening and USA CPI on the docket for Wednesday premarket.  Earnings season is ramping up throughout the week as well.

The market became a bit illiquid last week as participants aggressively sold equities.  Price action ‘broke loose’ which is a phrase we often use to describe the price action following a break from compression.  In these conditions, the quest for value and balance go out of whack and we are offered a rare opportunity to see real human emotion play out in the tape, often fear.  The event leaves a ripple in our environment and is likely to continue affecting the behavior of prices going forward.  Remember, price has memory.  Fortunately, the action managed to form brackets last week—guideposts we can use to assess price and volume going forward to determine if either the buyer or seller is gaining control.  I have noted these brackets on the following daily chart.  Note how prior zones of support and resistance are transformed into their counterparts:

10202014_daily_NQ

Given the progress of sellers over the last 1-2 weeks, the micro composite from Wednesday/Thursday, and especially given the amount of volume which came in on the downward action, my short term bias is medium bearish.  You can see three volume profile print-types: the large composite on the right (months of volume-at-price), the red and green ‘micro composite’ facing the opposite way of all the others, and the daily volume profiles.  Each tells me a different story.  I have noted the price levels I will be observing as opportunities on the following 15-minute volume profile chart.

10202014_intterm_NQ

The Check Back

Markets operate on fractals which occur on all timeframes and they look the same only the scales can be much larger.  One of the predominant characteristics of the market is to ‘check back’ or revisit a zone where a significant event occurred.  Once the Nasdaq broke loose to the downside its first stop was the major resistance zone we printed back in March 2014.  As we approach US cash trade, we are seeing some follow through from buyers who showed up at this level.  Volumes are still running on the high end in the globex session, but, as you might imagine, they are lower as we head higher.

Giving boost to index prices is speculation of additional stimulus according to many of the media outlets.  However it makes more sense to attribute this move to the oversold conditions which have persisted in the market since last week.  The issue we have is how long the market stayed oversold.  This type of long duration oversold event often precludes a shift in sentiment overall.

Investors are looking for this round of earnings to build confidence in the marketplace and thus far results have been mixed.  The earning season is only beginning however.  We have U of M Confidence numbers at 10am and an otherwise quiet economic calendar.  Also, although it might seem a bit trite, I continue to monitor the trade in NFLX after its jaw dropping 20% move to see how the market digests it.

I have noted the ‘check back’ on the following chart, and also where we are likely to run into some sellers.  These are very broad brush strokes which we can refine on a shorter timeframe, and then refine on a shorter timeframe, and then refine on a shorter timeframe to day trade.  However, stock traders and swing traders/investors should be keen on these zones:

10172014_daily_NQ

We are currently trading on the upper edge of yesterday’s range and it will be important to observe early on if buyers reject yesterday’s range.  If they do, we are likely to explore higher which puts prices into an air pocket which might lend to upside acceleration, especially if shorts begin to cover.  You will also notice the 2-day balance we formed on the lows featuring a clean taper bottom and a centralized VPOC—lovely symmetry.  I have also noted the price levels I will be observing:

10172014_intterm_NQ

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