Markets move in harmonics and fractals which produce events that are not necessarily repeated but without question have a certain rhyme.  Back in September there was a singular event you could point out on the Nasdaq chart which precluded the multi week trade lower.  Some call it a false move, others a stop run, but in auction theory we call it a failed auction.

The structure can be seen as taking out a prior high or low briefly, testing the waters beyond the reference point, before sharply reversing in the other direction.  It will not always produce the same outcome, however I now have a rule in place that insists I back off until this structure resolves itself.

We happen to have a failed auction print in place on the Nasdaq futures as we come into this week’s trade.  The swing high set during Monday’s trade was briefly breached on Wednesday only to quickly reverse lower.  Both times the new swing high was achieved via a gap higher to new highs which was subsequently faded lower.  The current structure is a bit different from the September event.  Here are the bullet point differences:

• September’s event was separated by eight sessions of trade and nearly a week and a half of time and volume buildup.  Last week’s was separated by two sessions within the same week.
• The Alibaba IPO was generating buzz the day the September failed auction took place

Returning our attention to the market, we start with a high timeframe and drill down closer and closer depending on our style of trade.  If you swing trade exclusively you likely only need to drill to the daily chart and perhaps a 15-minute chart for trigger points.

The weekly time frame shows wide indecision last week in a long term bullish market.  We are trading above the “14 year gap” left behind during the year 2000 dot com correction.  The following chart is of the actual Nasdaq composite:

On a daily chart of the front month Nasdaq futures contract (December ’14) we can see prices are trading on an island atop the strong V-shape recovery we recently printed.  An excess low printed and is shown as the long tail on Tuesday’s candle.  The trend over the last 2-3 days is flat while the trend of the last 2-3 weeks is up.  The gap up is still intact suggesting demand for equities remained present during all of last week’s trade.  I have noted a few other observations on the following daily bar chart:

The first addition I make when drilling down to the 15-minute volume profile “mash up” chart is drawing a volume profile which encompasses the six sessions of overlapping trade.  This will yield highly potent price levels where we are likely to see market behavior occur.  It also shows the auction health and structure on this time frame.  I have noted these price levels below:

Below are the levels I will be observing as we gap higher into Monday’s range:

Nasdaq futures traded lower overnight in a normal manner.  The largest blocks of order flow were to the sell side and as we approach US trade prices are trading below Monday’s range.  US Trade Balance numbers were lower than expected at 8:30am and received a somewhat muted response—there was a bit of responsive overnight buying shortly after the announcement.  We have Factory Orders set to release at 10am.

Coming into the new month traders had to come to terms with a large gap higher left behind on Friday’s trade.  The Monday trade also went gap up and we spent the entire session unable to close the overnight gap which led to some hesitance to take intraday longs by day traders.  With the market set to open inside of Friday’s range my primary expectation is for buyer to attempt to test higher and close the overnight gap up to 4156.75 before finding responsive sellers who defend the LVN zone from 4161.25 – 4160.75.

I am looking to see how aggressive sellers become and whether they are able to push prices below Friday’s low and if yes whether buyers are found leading to the formation of intermediate term balance or instead accelerate suggesting a sharp reaction of both Friday’s and Monday’s prices.  The upward progress made these last few weeks is stretched and whether the market begins accepting these prices via a slow and sideways balance or instead returns to the fast pace of October will be an important clue to the overall market sentiment.

I have highlighted the key price levels I will be observing on the following volume profile chart:

Nasdaq futures are flat ahead of US trade after a benign session of trade.  Volume and range are both below the 1^st standard deviation of normal which is even more abnormal for the Sunday/Monday globex session.  As we enter a new month of trade the markets are working through earnings and we have a few economic events on the calendar.

Coming up today at 10am is ISM Manufacturing.  Tuesday premarket we will hear US Trade balance and at 10 US Factory orders.  Also after hours Tuesday, BOJ Governor Kuroda speaks in Tokyo and the verbiage will likely be scrutinized after last week’s stimulus news.  Wednesday premarket we have ADP Employment change which has been less consistent than in the past followed by 10am ISM Non-manufacturing Composite.  After hours Wednesday are BOJ October meeting minutes.  Thursday premarket we have ECB news including rate decision and a Draghi press conference.  And Friday premarket we have monthly Non-farm payrolls and US unemployment rate.

On a weekly chart of the Nasdaq Composite we can see the sheer size of the green candles printed the last two weeks.  These two candles suggest the hammer candle printed three weeks back is confirmed as a short term low.  Even if it was not, the distance traveled means sellers have their work cut out to revert long term control into their favor at the best or into balance at the least.  For now, the long term time frame is bullish.  Note also how we are back trading above the ‘gap-zone’ from 2000:

On the shorter term, we can see how the market spent three days building balance before the gap higher on Friday.  This balance is best seen as the green volume profile positioned to the left.  I have noted some measured move targets which, oddly enough, one of the targets from Friday morning ended up being an area where the market found support.  I have less conviction in these levels than auction/volume profile levels, but they do serve as a frame of reference when we trade in an area lacking price history.  I have noted these levels and a few other observations on the following volume profile mashup:

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:

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 1^st 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:

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:

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:

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:

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

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:

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:

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:

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: