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