The economic calendar is quiet to start the week but will be ramping up as we progress.  We have NAHB Housing Market Index at 10am, Bank of New Zealand Inflation Expectation just before midnight, and UK and USA CPI data out before the open of Tuesday trade.

Nasdaq futures are currently set to gap higher to begin the week.  We are right about at the threshold of “pro gap” territory where seeking to fade the overnight action can require deeper pockets than most traders have.  The key however is to observe how we open and especially any attempts to reject the higher prices.  Opening like this, to start the week, up at contract highs, elevates the risk of an opening drive in either direction.

If instead we see an open auction and then some chop, we know the other timeframe is waiting before making a decision.  Either way, the discovery process is active until the market is done finding sellers.

I have noted the nearest low volume nodes on the following intermediate term chart.  If sellers can push trade down through 3958.25 then the market likely has done a good job finding sellers on the intermediate term timeframe and we can begin balancing again on this timeframe.  This may not be a welcomed development for the market.  I have also noted my measured move targets to the upside.  These serve more as reference points then specifics, but are upside road signs to gauge the action.  See below:

Therefore, should we see sellers push down and fill the overnight gap, we need to be keying off of Friday’s market profile.  I red starred the VAL at 3958.25.  If we start trading below that level, especially today, then you should take caution on the long side.  I have noted the key levels below:

One of the primary jobs we have as traders is determining what type of environment we are trading in.  What are the conditions?  Are prices moving fast or are we chopping around?  Our behavior can be adjusted accordingly.  This means stepping back and examining the price and volume action from a less granular level—instead observing a multiple day auction.

On my latest volume profile chart we can see multiple conditions all in one place.  At a glance we can see the long term volume composite, the balance occurring on a shorter more intermediate term timeframe, and also see the daily auction.  What jumps off the screen when I look at this chart is the balance formed during the last eight sessions.  These eight sessions are significant because they are the auction as we wrapped up July and began August.  A significant build of volume took place, we compressed on Friday before thrusting higher, and the thrust continued into Monday.  We are now trading up at the edge of balance and that high volume core is acting like gravity.  Between us and mean revision lower is a low volume node at 3901.25.  The behavior around this price will be my early tell on whether we go back and fill the gap that started the week.  Furthermore, how we behave around the high volume VPOC at 3885, a price vehemently defended by sellers last week, might indicate whether we have shifted into discovery mode, see below:

The overnight auction was quiet thus far, taking place inside yesterday’s range on low volume.  The biggest rotation occurred around 7:15am, it was a downward rotation of 14 points.  We have a Monthly Budget statement being released at 2pm and an otherwise quiet economic calendar until afterhours when Japan GPD data is set for release just before 8pm.

I have highlighted the short term levels I will be observing on the following market profile chart:

Quiet morning on the economic front, with our biggest scheduled event being premarket earnings announced by PCLN whose shares are currently trading over 2% lower on a weaker-than-expected Q3 forecast.  The calendar is relatively quiet until Wednesday, however we continue to be in an elevated headline risk environment associated with both Mid East and Russian tensions.

As we head into USA trade, the price of the Nasdaq is set to gap higher.

Turning our attention to the auction, long term participants are bullish to neutral.  Intermediate term players have been neutral-to-bearish since the end of July.  Last Monday we traded back up above 3900 and were unable to find sustained buyers.  Then several times last week, a responsive seller was found just above MCVPOC at 3886.  We are set to open above the 3886 responsive seller near 3900.   The intermediate term timeframe is in balance over 30 sessions after pulling back off the highs.  You can see the intermediate term commentary on the following composite profile:

Risk of a drive higher is elevated today give the gap up and away from a 4 day range.  The drive force becomes even more likely if we sustain trade above 3907, the nearest composite LVN to current prices.

On the contrary, if we open for trade and the market goes on SALE, with a large rejection seller who starts fading the gap, we are returning to a very ugly auction from Friday.  Caution if we sustain trade below 3882 it opens the door to an overnight gap fill down to 3873.75 which puts us on the mouth of a slide zone down to 3867 and Friday’s session had a poor low which too would be vulnerable.  It is context to keep in mind today, this poor structure, especially if we see an aggressive fade.

I have noted the short term levels I will be observing on the following market profile chart:

Friday’s Nasdaq auction took on an odd formation which in part was news driven.  The profile itself does not provide much short term signal, but it does provide many juicy opportunities if we auction through it early next week.

First off, both price extremes, the high and low, were poorly formed.  Thus if we open for trade inside this range Monday and price action begins pushing toward one the extremes, it is likely to break.  Second, when news of the Russians withdrawing troops they had postured along the Ukrainian border hit the wires price lurched higher leaving a series of single prints on the tape.  This thin area received no auction.  If you look to the left you can see we already spent a significant amount of time deliberating these prices, thus we may not need to auction them again.  However, if price pushes into this slider range from above or below, we are likely to sweep right through it fast.  Finally, all of the action took place inside of Thursday’s range, an inside day.

An inside day is often used to signal indecision because neither the buyers nor the sellers are able to push the price beyond the prior day range.  It may suggest the recent index weakness is coming to an end.

Be sure to tune in Monday morning, when we have more updated prices to template against this profile.

Nasdaq futures were very illiquid last night and with only slightly above average volume we managed to print over 40 points of range.  It started yesterday evening when a wave of sell flow pushed the market lower.  The timing of the selling loosely correlated with US President Obama approving the use of strategic air strike in Iraq.  There were also so big moves occurring across the Forex complex including the Aussie dollar.  Around 4:30am prices reversed course and quickly auctioned higher and the push managed to take prices up above yesterday’s midpoint.  As we approach US trade we are set to gap a bit higher however prices are on the move, and where we are in a half hour could materially change.

One of the questions we constantly ask ourselves as speculators is, “who is participating in this tape?”  There are day-timeframe and other short term participants or “locals”, intermediate term investors, and long term players, and believe it or not, longer term participants.  Think of locals like car dealers—they only hold inventory for a very short time with the intention of facilitating trade between the long term seller (the auto manufacturer) and the long term buyer (the consumer).  Locals do not have strong drive or commitment to prices, and do not drive directional moves.  Intermediate term participants may extend prices a bit with their position entry because they have a longer term horizon and do not observe short term price levels.  The long term participant will drive through many price levels, moved to act perhaps by a geopolitical event or macroeconomic theory.  When they act, our job as smaller players is to stay out of their way or join their order flow.

This is the essence of timeframe analysis.  The challenge is keeping it all straight in the heat of the trading day which is why I create these morning reports.  However there is always a possibility of a better looking glass or tool for observing the action.  I have been building this new volume profile chart for a few weeks, have a look.  You will notice three sets of volume profiles.  The black outline is the long term composite, the red and blue on the far right is the past six days of trade (the stalemate between a big buyer and a big seller), and finally each daily volume profile.  I have noted the key prices which likely determine the victor of this intermediate term battle, as well as other interesting short term levels:

I have noted short term observations and levels on the following market profile chart:

Some very specific price levels were mentioned earlier, price levels which without doubt “brought the action” if you will.  This tells you the methodology is effective.  Initially, I though losing such levels would be a reasonable indication that my longs should be reduced, and perhaps they should have.

But there were a few observations which kept me in-

1.  We printed an excess low on the /NQ_F. Excess is a tail, it is price going too far and snapping back in the other direction, it is touching your hand to the lid of a charcoal grill because you are drunk.  A strong reaction occurs.
2.  Although SPY and QQQ made new lows on the week, Russell diverged
3. Momentum stocks, creatures of wonder as they are, were way off their lows all over the place
4. Our VPOC is above yesterday’s, see below:

When faced with these observations, there was little choice but to stick with the course I have plotted.  My TNA long sits unchanged, how bad is it out there, really?

The negative news cycle is as pronounced as we have seen in months, maybe years.  I remember a wave of selling hitting the tape at any mention of Euro Zone weakness, how soon it was all forgotten?  Now we lose 9 Nasdaq points on a Russia/Ukraine piece, any piece, yet a bid remains in growth.  Observe, and mind you perceptions.

How many of you, with your own eyes, have observed the Russian troops amassed on the Ukrainian border?  With your own eyes, not stock frottage from CNN of fucking tanks driving around.  Imagine a big group of Russian men, tenting out in the wilderness with combat gear and vodka, being Russian.  Who are they even threatening besides themselves and the local wildlife?

We have a seller.  The seller has conviction and shows up every time we press over our composite VPOC.  If this seller is put on their heels it would be a massive amount of fuel for upside.  If they drive lower, they can take profits and reload on the next rip.  They have not had much of an opportunity to book gains yet, just as the bulls haven’t.  The two forces are very much clashing until we have a victor.

Until the market goes decidedly red, dragging bull carcasses around the ring while a mariachi band plays, there is a bid in this market.

Nasdaq futures caught a bit of a pop this morning right around the time European Central Bank released their rate decision which continues to be in line with expectation.  About half of the fast gains have since been given back, and the sell flow began at 8:30am when ECB’s Draghi began his press conference.  At the same time US Continuing and Initial Jobless Claims were released.  Continuing Claims were worse than expected and Initial Claims better.  The rest of the economic docket is open today aside from a 10:30am Natural Gas report energy traders will want to keep an eye on and Consumer Credit at 3pm.

The intermediate term timeframe is flirting with the idea of going seller controlled.  We are almost developing a pattern of lower highs and lower lows.  To negate this developing process, buyers need to step up and establish a higher high very soon.  If they can hold the LVN at 3865.25 it would be a productive start to the process.  Even if they cannot press up and out today or tomorrow, by simply slowing the action down they would fortify the idea that intermediate term balance is still in place.  I have highlighted key intermediate term price levels below:

Buyers are still on their heels, and without stabilization soon we risk another acceleration of price discovery lower.  The question I constantly ask when the market is working on building a swing low is, “Is the market done finding buyers?”  We saw a sharp responsive buyer off the open yesterday morning and the action saw continuation into the afternoon—initiative buying coming in after the fact.  Once a strong bid is established, this is what we see, the action process goes in the other direction until it is done searching out a seller.  The process forms value.  If the conviction buyer does not show up to defend her responsive buying yesterday morning, that could be a shift in short term sentiment.  I have highlighted the key price levels I will be monitoring early on the following market profile chart:

Futures are lower overnight on above average volume.  The largest impulse rotation occurred around six AM and futures have since shown little bounce.  The price action was able to take out prior swing lows from August 1^st.  Swing highs and lows are rarely set during the globex market, thus we might expect these overnight lows to be tested once the cash market opens.

The economic calendar is quiet for US trade mostly, however we do have Crude Oil inventory data out around 10:30am.

Prices are currently trading outside of yesterday’s range which suggests participants rejected the aggressive balance formed on Monday and Tuesday.  The question we must be asking ourselves throughout today is, “Is the market done finding buyers?”  If we do not see any strong reaction from buyers today, then the market is likely to continue exploring lower until it finds such a demand.

I have marked up the intermediate term prices on the following volume profile chart.  We are trading down in the thin tail of an intermediate term balance dating back to the start of July.  With prices making news lows early today, the argument can be made for a shift into intermediate term seller control.  However, we should first observe how we open, see below:

Finally, I have marked the short term levels I will be observing on the following market profile chart:

Of all the day types formed by the natural ebb and flow of market participants, no type elicits strong emotions from traders like the Neutral Day.  And when you examine the formed structure and think about it rationally it makes sense.  Keeping a cool head during a neutral print often affords you an opportunity to enter long or short at favorable intraday prices.  It can also mean the difference between showing some brass when you need to instead of capitulating at the worst possible moment.

Yesterday and today were both of the neutral variety.  Yesterday was an opportunity to squeeze out the shorts before heading lower, and today might have been the markets best shot at shaking off some weak longs before heading higher.  This much is for certain—two neutral days, printing opposite one another in unison is a powder keg of potential energy for the next move.

I am nearly 100% long into what may be the biggest move of the summer, sword out and shield on my back.

If you want to learn more about days types, in particular the neutral print, stay tuned, for I have something very exciting in the works.

I continued my efforts to add value on Twitter today via my handle @TwoSmuth. Why not throw me a follow or retweet? See below:

When the NQ and ES both go neutral, don't chase your own tail into the hole

— Raul (@TwoSmuth) August 5, 2014

No complaints about "rigging" when the tits are ripped off this selling. You have been warned.

— Raul (@TwoSmuth) August 5, 2014

Be sure to pay close attention to tomorrow morning’s context read, it should be pretty clear where the battle lines are.

The buyers got a bit ahead of themselves early yesterday afternoon when they pressed prices up through the highs. Once doing so, they uncovered a strong responsive seller who patiently let price come to her and then erased over 20 points of progress in the final 30 minutes of trade lasting from 3:45-4:15pm.  That pulse of selling carried over into the overnight session where the brief pop in prices after weaker-than-expected Chinese PMI data was faded and prices continued drifting lower.  On our economic radar for today’s trade is ISM Non-manufacturing composite at 10am as well as Factory orders at the same time.

The intermediate timeframe is spreading out like discovery is taking place, but as a pile of volume-at-price it still resembles balance.  The balance we can observe dates back to the start of July, has a low slung VPOC just below our current prices, and we are currently muddling through the thick value zone.  I have highlighted the key price levels below which will serve as sign posts as the story unfolds:

You can see the intense indecision on yesterday’s market profile which has long tails on both sides of value.  This is the nature of a neutral day which has a real lack of directional conviction.  I have noted the price levels I will be watching early on below: