We saw an interesting session yesterday.  After gapping out of a multiday range and opening higher we immediately saw selling on the open.   The sellers drove price lower for the first half hour of trade and we had ourselves a weak morning gap being faded.  The buyers seemed to watch the morning activity play out and after letting the sellers bring price in they went back to work bidding up price.  They stayed active throughout the rest of the session.  It would only be ten handles higher when sellers were able to react and overpower the upward momentum.  We closed the session higher than the open and above the day’s midpoint.  Bulls won.

At this point the sellers have much work to do before regaining any semblance of control.  Given the progress higher, there is much room below for buyers to put in a higher low and remain in control.

For today’s session, I’m sticking with the bull and will be hesitant to cut names unless we lose yesterday’s value area low at 1474.  Keep in mind only my weakest would be cut below here.  Any new long trades would be trades only and mostly of the short squeeze variety.  I don’t intend to initiate any intermediate-term swings at these levels.

Top two picks going into today: PPC & DNKN (chicken & donuts)

More often than I would like to admit, I make a solid call on the direction but my stocks hardly participate.  Today was one of these days.  My stocks are up modestly.  The portfolio is green which is always good.  But considering I’m 75% long I would expect a bit more juice.  Every time this happens I’m reminded I need to finalize my alogs.  They’ve been on the backburner for months, simmering, thinking, waiting to wage war on the world’s futures markets.

For now we must continue to bank our coin trading these stocks.  With the markets levitating higher like this, I’ve been quick to take profits on extended names and toss the money at fresh ideas.  The rotation is great and keeps the portfolio humming along like a well oiled Ponzi scheme but eventually I want to settle into a few companies as investments, not just trading vehicles.  I like the Japan thesis Fly built.  It was odd when my good friend who does big business in Japan but never invests asked me if I knew anything about EWJ and if it held good companies.  He wants to get it.  Apparently they’re loving Abe over there.

Whether or not this is a peak I’m not certain but we are getting to a level where I like to lighten up.  The trough is where I like to do my business.  We had a nice trough the second week of 2013 and we did work here at the Raul3 blog.

I may lighten up my long exposure tomorrow.

The gap higher this morning is yet to be faded and many stocks are playing along in the rising tide.  Given these conditions, I’m very hesitant to fight this tape by any means of hedging, raising cash, or shorting.

My style is to never fight the tape.  Quality volume or profile shape aside, if price is moving higher that is the final arbiter.  Price pays, nothing else.  I would not consider fading today or cutting small losses unless we see trade move back into yesterday’s value.  On the S&P you would look for trade below 1468 as your sign.

Until then, enjoy the levitation and consider buying some strength, Texas hedge style.

http://youtu.be/deghL8o0qHM

The buyers continue to show conviction, and with the powerful numbers out of Goldman, and Jamie Dimon taking a pay cut to save face for having degenerate traders in his ranks I can understand their conviction.  The financials are getting their act together.  And the semiconductors are seeing buyers rotation.

The characteristics of yesterday’s profile suggest shorts were put into a squeeze.  You can see the “P” shaped profile suggesting the rally higher yesterday was drive by old business like shorts buying to cover their position.  This also suggests that the rally struggled to encourage new participants to enter into the market.  Should that theme carry into today, we could expect the market to auction lower, filling in the lower half of yesterday’s profile.

The other scenario is a break higher.  As over extended as we are this is still a real possibility.  No need to get fancy trying to spot the rally, just look for price to take out yesterday’s value area high and how we behave as we approach the high of the day at 1469.

It seems like the market was trying for lower yesterday but the pesky buyers were not having it.  The market gapped lower and a fresh batch of buyers stepped in and auctioned price higher all day.  Morning buyers had it easy.  They spent the morning targeting a gap fill and the afternoon featured a little dip after the FaceBook noise where eager side liners could grab the wave.  They were rewarded too as the index pushed to new highs before eventually settling near the value area high from Monday.

The profiles are overlapping, building potential energy.

That behavior into the close does signal resistance however.  Looking closely at the auction above 1466 yesterday we can glean insight.  Late day chasers, perhaps swing traders positioning for an overnight play were punished for their lack of discipline. Or it was a little short squeeze.  Either way, it created excess above and we closed within yesterday’s range.  That is why yesterday’s closing print at 1465.50 is our key resistance next time we go for a new pump.

The globex session has mostly glided lower, but Goldman just crushed estimates.  As of 8am 1460 has been support.  This level also is in confluence with the single TPO prints yesterday.  If this level can’t hold the market will begin exploring lower.

One of the first things I looked at this morning was a zoomed back chart of all the 2013 daily auctions.  I then traced the progression of the high volume nodes to shine light onto the intermediate term auction.

The trip thus far has been a very orderly auction, with the first pullback tagging the high volume node (not leaving it naked) and the pump following the pullback achieving new highs.  When trading momentum this is exactly the type of behavior you want to see.

The last three days have seen the progression of value slowing and beginning to tightly overlap, with our prior two sessions actually sharing a point of control at 1464.25.  The behavior around these levels the next time they trade will be a key piece to the overall picture.

As of this writing the globex session is making fresh lows and we could be starting our second pullback.  However I’m hesitant to call direction with the several macro events occurring today.  Instead my plan is to give more weight to the afternoon session and simply manage my existing positions.

Should we trade lower we will look for signs of buyers at the 01/09 VPOC at 1455.75 then the same day’s value area low at 1454.  If those levels can’t hold the sellers will target the 01/08 value area.

Friday featured a blunt shaped profile as the S&P resisted the urge to sell off instead opting to properly auction the toothy area from Thursday’s afternoon thrust.  However it sustained the level on the lowest volume since starting the year. Sustaining those levels was telling of the demand for equity exposure.  However we want to be aware of price levels that could signal a change in risk appetite.

Given the progress we saw last week, the risk range below has increased significantly.  I’ve noted in blue our first key area of support.  Coming into the US morning we’re seeing the Globex session off nearly six handles after making new highs at 1471.25 overnight.  As of 8am, we’re set to open near this first level of support.  Thus how we open will be very informative of the early tenor of market participants.

Should we break the Friday VAL (noted below in blue) it will be a quick trip to the naked volume control point.  If buyers aren’t present here we could see a quick rotation through Thursday’s value area and a test of our major support for the week noted in green.  Seeing us back in the 1450’s should not be a cause for closing out all long exposure, but we should closely observe the markets behavior at these levels should they trade.

The morning trade in the S&P played out in the constructive manner I suggested in my morning posting.  We’ve seen a thorough auction of yesterday’s upper range.  The market has sustained these levels even with the overall weakness from the financials.  I think that adds a layer of constructive bullishness to this mild mannered auction.

There are only three scenarios as we wind down into the close of the week:

1. Close within the auctioned range from today
2. Upside breakout
3. Downside breakdown

Scenario one and two are both bullish.  However, should scenario one occur, I will be more apt to scale long exposure off.  I would consider such a move a bit euphoric.  Scenario three isn’t damning to the bull case unless we lose the key support I referenced this morning.

http://youtu.be/V8rZWw9HE7o

There are times when the profile formed by a day session doesn’t look quite right.  Often this is a result of price being jerked around by the indecisive participants jostling their books.  Specifically, the upper range yesterday looks poorly auctioned.  It looks toothy, with no clear distribution of TPOs or volume.  One of the most constructive things the market could do today is properly auction the upper range from yesterday.

Overnight the S&P found support at 1465 but to my eye what’s most important today is where we sustain trade relative to the upper volume distribution noted below in blue.  Notice the very Gaussian form of the distribution, with a high volume node (point of control on the day) residing near the middle of the distribution.  This is a healthy auction.

One last note, the aforementioned distribution makes up the upper half of yesterday’s value area.  I’m giving yesterday’s value area a bit less significance since the lower distribution isn’t as uniform.  However, if we begin trading below the VPOC at 1462 a slip down to the value area low becomes very likely.  If we visit the value area low and whether the bulls show up at that level will speak volumes to the conviction of longs going into the weekend.

We’re starting to get several layers of profiles building upon one another.  Seeing this tight consolidation after the monster run we had to start the year is impressive. It suggests a strong bid is present in the market.  Support levels are holding.  I’m always on the lookout for a rug pull, but I continue to give upside the benefit of the doubt.

First level I want to draw attention to is 1456-1457.  I highlighted the price level yesterday morning for its confluence of multiple reference points.  Yesterday added another reference point to the mix after trading above the level for most of the day only to give it up going into the afternoon.  The result was a very low volume “slip” zone.  I won’t look too far into the level except to say interesting activity has occurred at the level and where we sustain trade relative to this price is our tell going into the weekend.

Key overhead resistance for reference today is the VAH from 01/04 which also was the globex high as of this writing.