Know Your Levels for Pocket Gameplay

The macro waves we began to see last week continue to swell as we head into trade this morning. Late yesterday afternoon The Russians significantly hiked their interest rates. The Nasdaq shrugged the news off initially but around 6am, amid the Russian markets trading down significantly, sell flow rushed onto the tape.

The resulting globex auction carries the second highest volume dating back to July 2012 and a 2^nd sigma range. In short, statistically this was a highly abnormal session.

As we approach US trade, prices are trading higher and retesting Monday’s low print at 4141. I suspect this level will be of interest in early morning trade, especially as it also nearly marks the globex session midpoint.

The market is heading lower. It is doing so in a process we call discovery in auction theory. The market will continue to head lower until it finds buyers. You can now simplify your job down to answering one question—is the market done finding buyers?

Answering that question is a matter of observing characteristics of a quality swing low and making an educated guess. There are no guarantees in trading.

Taking to the charts, yesterday appears to be a continuation of Friday’s selling where we trading out the week on the lows. Once it breached the very low volume node near the middle of the breached volume pocket, our expectation was for price to continue to the high volume node on the other end. This is basic pocket play.

The responsive buyers were active at this level (about 4144.75) and produced a decent looking low. I initiated a weekly call option in NFLX right around this level and it immediately caught a strong bid as well.

However, the session moved forward, and the buyers were unable to defend their bounce and instead gave back nearly all of it by the close. This was a clue. If the market had truly found a buyer here then we likely should not be back down near the lows. I cut NFLX for this reason, as it too was hovering near my entry.

Overnight price breached the next very low volume pocket. Whether sell flow pushes prices below 4115 during RTH will be my clue regarding lower prices. Swing high/low are often not established during globex, thus sellers have the edge.

My primary expectation is for and open auction outside of range where prices to attempt higher early on. Whether buyers can reclaim Monday’s range (4141) and the overnight mid (4143.50) will be important. If they can, we might see a test of the overnight high 4176.50. Otherwise we continue trading lower to test the pocket mid at 4115 and if that breaches then my expectation is for trade to continue down though the pocket.

The HVN on the bottom of this pocket is not as peaked as the one we experienced yesterday, thus trade could become a bit muddy in this region. 4053.75 is the ultimate target on the pocket fill but we may see responsive buyers before then.

Hypo two, with an elevated expectancy, is and opening drive down. This would take out the 4115 pocket mid early and work down to the 4053.75 target quickly. In this case we may blow through the level before finding a responsive bid.

Third hypo is buyers sustain Monday’s range, take out the overnight high (4176.50) and make a run for 4200.

You can see these observations and levels indicated below:

Ship’s Log, Week Three-Day One:

Seas remain turbulent in what has been a most unruly December. Today conditions were exacerbated when the skies opened up and a glimmer of light shined down for a brief moment. Lo and behold it was only the eerily calm eye of this tumultuous storm.

Crew member morale is suffering after two of our finest deckhands were thrown overboard by today’s large swell. They’re a rugged bunch and have been making due on the glue binding my books and boiled boots. My only concern is that scurvy may set in soon.

There are whispers of a mutiny and others who are having fantastic visions of a flying deity coming to save us. The two forces are equally balanced but the scene is a formidable powder keg vulnerable to even a small spark.

I myself continue to dine from the Capitan’s rations of meat, legumes and dried greens which has me feeling fit. However a rogue wave succeeded in throwing me into the wildly-spinning wheel which maimed my hand. It appears I will be forced to either remove said hand or die of infection.

We will press onward with our quest and have added a third scout to the highest mast—two to search for land and one to explore the skies for this mystical deity. Morale must be maintained, even if it means committing resources to so called magic.

Certain pieces of business have to wrap up before others can occur. I am of the belief that we just settled some important business in the Nasdaq.

Whether we want to settle the next pocket below, I am not certain, but my expectation is to see buyers start to come out of their holes here:

Nasdaq futures are higher to start the week after a weak close on Friday. The market found a bid at an interesting level, 4180.25, just a few ticks above the midpoint/LVN of the volume pocket we entered during Friday’s close. The range is just beyond 1^st sigma suggesting an elevated risk environment and volume is running high 1^st sigma as well.

Just before the open the Industrial/Manufacturing Production data is coming out and shortly after the open at 10am the NAHB Hosing Market Index. More housing data is due out later in the week but the highest impact news comes Wednesday when both the Bank of England and the US Federal Reserve will be releasing minutes, employment, economic projections, and rate decisions.

Last Friday, after printing an abnormally wide initial balance (52.5 points) during the first hour of trade, prices spent most of the session churning inside the wide range. Then, in the final hour and fifteen minutes the market sold off sharply. The move carried into last night’s globex for a short bit before reversing higher.

Prices of crude oil are still drawing the attention of macro players and a rally overnight in the commodity is being at least partially attributed to the strength in equity indices.

Early on I am looking for sellers to press into the overnight inventory. Whether those sellers are able to take prices below 4200 will be telling early on. Initially I will be looking for signs of buyers at these levels who work higher toward overnight high 4227 and ultimately target Friday’s VPOC at 4231.

Secondary hypothesis is for sellers to accelerate below 4200 and target overnight low 4180.25 which opens us to the idea of continuing to explore lower prices especially below 4179.

Third hypo is a strong buying move to test the weak high up at 4251.25.

I have highlighted the levels mentioned on the following volume profile chart:

Late last night, at the quietest hour, I sat outside and listened.  Sitting there, very still and mindful of the universe around me, I began to probe the cosmos for sleigh bells.  As of this moment I have not heard those sleigh bells jingling.

But when I do, you will be the first to know.

Also, the latest Weekly Strategy Session is complete.  Subs, be sure to check it out.  We need to stay sharp though the holiday parties and the candied canes.  There is still work to be done to close out the year properly.

Yesterday rip-snorted open with enough conviction to motivate me to buy several positions I was stalking all week. It was a methodical process, pressing into fast movers on the way up, low bidding on the way down.

Some buys were at good prices. Others have already taken their fair share of heat.

And here I am, fiddling with lines on charts making sure all the administrative pieces are perfect so I can resume my Nasdaq trading.

As the weekend draws near so does the faint jingle of sleigh bells. Santa (aka UPS) has been visiting my door daily with troves of consumables for loved ones and me. Soon Santa will visit my trading account and propel my worth up, up, and away.

I know this, not because I am a fantastic lunatic, but because I have cold numbers to rest my weary head on. Therefore I sit, and stand at times, and patiently wait for that magical moment when all of these little moves coagulate into a big blob of winship.

Until then, enjoy the season. Nobody wants to be around a dickhead.

Warm regards,

Raul

Knowing when to roll forward into the next quarter’s future contract is a vital piece to trading. Yesterday was no exception. If you were observing the December Nasdaq contract than you did not see the failed auction that occurred at noon ET. We traded two-ticks above Wednesday’s high and immediately failed back lower followed by a big swoosh down.

These little contextual pieces are the details that add up when you are trading.

Moving into today we have futures trading lower. The Nasdaq after hours continued lower for most of the session. On a day-by-day seasonality study of the last 30 years, today has the second lowest odds of being a positive gain session. Ranging 44.25 points, the session is normal statistically, with the 1^st sigma range of a down day being about 46 points. Volume is a bit higher than first sigma as it appears most participants have now migrated to the March contract.

Yesterday had many characteristics of a trend day early on but we saw that negated. That force of supply is likely to carry into today’s session. At 9:55am U of M will be releasing their survey and we have an otherwise quiet economic docket.

I am still sorting some issues out on my charting, but my primary expectation is for price to trade lower to test the overnight low 4189.25 before finding responsive buyers and balanced, two-way trade ensues.

Today started off as the second most robust first hour of trade this year. It was plum robust, no other way to describe it.

My portfolio was robust too, actually making back more than I lost yesterday, a feat that has escaped me during much of this choppy charade. All it seemed was well at the plantation a la Raul.

I went about my work, subtracting 4.75 from line after esoteric line on my market odometer aka price chart. I did so with a humble appreciation for smarter software and robots, neither of which I currently possess. Instead I possess old fashioned persistence and patience.

Along the way I started buying January calls. I built a rather significant January holding today, on the way up and down, buying all sorts of neat stocks. It’s buying, I have been using my computer to buy anything and everything like a madman for weeks.

I am normally a prudent person, spending very little for much of the year. But then the year draws to an end, all the chips are counted, and I simply become grateful. Once I loosen up and start buying look out. I have Amazon, New Egg, Groupon, and many more ‘sites’ permanently opened on tabs, ready to fire off orders and any given moment.

But clearly I digress. I went out and bout BAC, NMBL, CLDX, TSLA calls and some S common.

Yep, I did all that.

I also closed out my BIDU weekly calls. They had all the right moves to start the day. And they might exceed my strike tomorrow. But plans are plans. I waited too long to stop them, they could have been a scratch after taking out a very short term level. It all depends on how you set out to manage these types of positions. I gave it end of day slack and the sellers pressed nearly every last minute of the closing trade.

I have one shot left to trade BIDU and still like this chart.

In summary, I made a new bed today with all sorts of new January risk. Was it too soon? Only Santa Claus truly knows the answer.

Futures traders are rolling forward from the December contract to the March contract for active trade today. Even though the December contract does not finish trading until next week, trades migrate the Thursday before.

This causes a bit of confusion the first few times you experience it. Then it just becomes another piece of work you have to do as a futures trader.

Depending on your charting platform’s abilities this can be a relatively smooth adjustment. Unfortunately, my charting platform lacks certain capabilities, like adjusting price levels.

Thus, I have to manually adjust about 300 historical price levels -4.75 points. The March contract is currently trading 4.75 points below the December contract due to backwardation.

The only real frustration I have from here until the end of next week is how volume is split between the two contracts. Less volume where I am equals less liquidity and less visible moves. In fact, its likely I won’t even trade futures until this who rollover resolves.

In summary, bear with me and I will have some charts up later on today.

Context is a clever arsenal of details. You could take the neutral extreme we printed yesterday, all by itself, and say it carries strong directional conviction for today’s trade. You can cite the longer term trend as skewing the bias to the upside. You can lean on the seasonality of December.

But there were a few other pieces giving us pause. The December seasonality, when sliced into weeks, tends to show this week as the, well, weakest. Then you have tomorrow, ‘contract roll over’ and also the Thursday before OPEX, a day famous for its shenanigans. Third there was the nature of yesterday’s neutral day-it never ‘checked back’ after second range extension. That bothered me a little bit. Finally you had the two-three day trend which, despite yesterday’s valiant rally, was down.

I often refer to context as baking a cake. You put all these ingredients into the pie and then the market opens aka the oven is turned on. Sometimes you just let the cake sit and other times you have to poke and test it because an observation changes your perception.

All I bought today was add to a small BIDU weekly call position I have. This position still looks constructive especially if it can survive tomorrow’s purported shenanigans. Obviously I wish I had a bit more time attached to my position, but I will play it to the final buzzer if need be.

All I sold today was the pop in LAKE. I got out before these earnings. It was a small win but a win nonetheless.

The funny thing is how my positions careened lower and took a bigger chunk on the way down then they accumulated on the way up. Even with less exposure on the net. He he heh, funny.

At this rate, the year needs to end. I can see no other way out of this mess. That, or a Christmas miracle of biblical proportions.