Enter Pro Gap

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:

The essence of trading is having a plan.  The good thing about a plan is you have a theory about how price will move.  This theory is based upon a story you build.  My story centers around the ongoing 2-way auction in the Nasdaq.  It has guest appearances like a TV show, but the primary cast is the same.

The current guest causing a big splash is Mr. Jack Ma.  He has a character about him—one that brings a touch of drama to the sell flow in BABA.  Other guests currently in play are Oil, Rusty (The Russell), and le VXN.

But the primary plot today was to watch for follow through higher on yesterday’s strength which will find responsive sellers.  This happened, we nearly printed a neutral extreme (this settlement period buying is making an earnest attempt to make us neutral only), and that is how we found our seller.  Now the question is whether they carry the same tenacity and flow as their initiate move, or if instead we enter a churn.  No one  can say for certain, however I adjusted my book in the interim.

I sold half of my TWTR long—there I said it.  It was awkward because I have been with this long since about February.  I rode through the entire trough, being supportive and sharing ancient Roman and Eastern philosophies with it to build a strong foundation.  I made sure it had good nutrition and when it still acted up I would just coddle it and tell it everything will be okay.  But one must draw the line and I had to create a bit of separation.  This is good for both of us.  Twitter has a big event coming up (earnings) and I would rather be a side piece just in case it does not turn out as expected. In any case, I can always work my way back into the weighting I once had.

I also joined the 12631 crew on the TZA trade.  This is good.  I have a hedge in place now verses my other longs.  Speaking of which, GNRC caught a little upgrade this morning.  I like this company into the winter.  Their product runs on cheap natty.  No home is complete without a natty gas generator, IMO.  Especially in Michigan, where the sun seldom shines but a deep enough hole yields pockets of the sweet gas.  If the proverbial excrement hits the fan, you will likely find me digging deep, Kevin Bacon style, for gas to power the mother ship.

We will ride through earnings together, shotgun in tote.

Equity futures are flat overnight after a quiet session of digesting yesterday’s move.  As we approach US trade the CPI stats are out and roughly in line while some traders may have expected a bit softer of a number.  This is lending a bit of strength to the US dollar early on and the initial reaction in Nasdaq futures is muted.  Buyers managed to extend yesterday’s progress a bit during the globex session before finding responsive sellers who neutralized the session.

Below is a daily chart of the Nasdaq futures where we can see just how sharp of a rejection buyers created with their response to the discounted prices.  I noted the midpoint of the down move yesterday which is at 3902.375 and I combined that with the midpoint of the current up move (which is still in development) at 3832 to highlight a broad ‘pivot’ area.  Whoever controls this zone has an opportunity to control the long term timeframe.  There is also a very well defined LVN above current prices as we press into the scene of the breakdown.  My expectation is for the market to find responsive sellers at some point today:

If you look at the nearest profile to the left of our current prices, you can see our ‘template day’ or the day we are trading relative to is thin north of 3979 until about 4014.  If this was our only observation we might consider the risk of a fast slide up this zone.  However, there is a larger balance in play up here.  It is the red and green micro composite on the left side of the screen.  It tells the story regarding the last auction we held at these prices.  I have carefully selected the price levels I will be observing as we enter this zone (and beyond) on the following volume profile mash up chart:

The market is the final arbiter.  This is something ChessNwine reminds traders of weekly in his strategy session.  If you find yourself becoming frustrated, euphoric, or BABA forbid panicked, then you are likely attempting to impose your will upon the market.  You are entering trades knowing they HAVE to be right because you are so god damned bright.

This is a fool’s game.  Well not quite.  It is a game for the humble sportsman (or sportslady?) who is tickled by the extraordinary.  And there is one thing you must impress upon your method if your method follows the tenants of momentum—your allegiance is to be sworn to the heaviest puncher.

The price action we are currently experiencing in the marketplace is peak abnormal, which, oddly enough, normally happens once in a while.  It is a good thing, a notch in the belt of survivors.  But think quick because you have not survived yet.  This is an ongoing extravaganza.

Equity markets are rallying hard today.  The Nazzy wants a 100 print after pulling the inverse last week.  Remember what I said last week?  About big waves?  You settle your heart by taking slow consistent breaths and allow it to take you as it desires until it throws you loose.  Then you begin to swim.

I am still doing very little, however, given the magnitude of the harmonic down, one was fortunate enough to back off the idea of hedging until a proper revision occurred.  Now it has, we are over the mid, and I am wondering if the bears jumped the shark with this move.

I know, it sounds crazy, perhaps fiduciary  questionable, but sitting and taking that sell flow to the nuts for a few weeks might have been the best course of action for longer term positions.  Again, this is all still TBD.

The rub?  They timed the rout about perfectly to zero out your October leverage.  Mine too, those fucks.  But sharpen your axe, purchase common on discount, and hone your strategy for another gregarious thrust.

You thought I was done thrusting, didn’t you?  You must know, Raul possesses the energy of 10 adhd afflicted teens.

All this to say I made no alterations to my book today.  This melt up was a gift however to my long term positions which are making admirable recoveries.  I still might dial them back.  However, this must be done very slowly, not all at once.

Think fast, move slow.

http://youtu.be/2YcIgow6TDk?t=3m17s

Four hours of continuous buy flow impulsively ripped through the globex marketplace this morning.  The move is being attributed to an ECB corporate bond buying plan according to a few media outlets.  The ‘why’ of a move is often the focus of media outlets, but we focus on the ‘how’.  We know for certain a dominant buyer overnight rejected us away from yesterday’s prices.  This puts the Nasdaq out of balance as we approach cash open.  Our next job is to assess how RTH participants react to this new development.

There is a general consensus of skepticism surrounding the market bounce currently taking place.  The dip lower that precluded our current market bounce was fast and spanned a wide price range.  This leads many to suspect any bounce will eventually roll over, likely before attaining new highs.

That theory becomes a bit thorny as we enter today’s session.  We are now pushing into a zone where the market is likely to find sellers, however if they instead back off the tape we have a high velocity move underway which could carry us to new highs.

Buyers were impressive yesterday.  The session started with a strong push higher, lingered for the rest of the day, and finally made another thrust up into the bell.  Looking at the daily chart below, we can see prices probing a prior area of support which also features a high volume node.  It appears we will ‘test through’ this zone to the LVN on the other side before determining if this zone will be converted into resistance.  On the whole, this is the first real pullback since this move started.  I have noted the motivated move lower, its midpoint, and a few other observations below:

We always observe the midpoint of a major move in the marketplace.  Major is relative as the markets produce similar patterns on multiple scales and timeframes.  This is why you hear the word fractal thrown around in these parts.  Put simply, the mid is a simple number to calculate and observe which makes it easy to run statistical analysis on, build trade ideas on, and build executing algorithms upon.

On the shorter 15-minute timeframe we can see the market is returning to its normal function of balance-discovery in a quest to determine value.  The recent low printed a clean balance volume profile before we began exploring upward.  Now price is probing into the volume profile printed just after we left a 7-day balance and only moments before we printed the fastest leg of the downward move.  This is our template day of volume-at-price to observe for today’s trade.  I have highlighted the key price levels I will be observing on the following chart:

The market pace came grinding to a halt this morning after a strong push higher.  We are still operating in an environment which produces larger-than-normal ranges and slightly elevated volume.  However the bulk of today’s move occurred during the initial balance aka the first hour of trade.

It almost seems foreign, the benign intraday action, after enjoying 10-12 sessions of white knuckle racing across the price complex.  There are several charts setting up nicely intraday for longs, however each time I zoom out to an hourly chart or even a 15 minute chart I see slop.  This is what has prompted me to shorten my target distance and trade duration.  Little bounces up into resistance are the singles that I can currently manufacture to bring home some wins.

Into the weekend I gave serious thought to liquidating some of my longer term holdings including TSLA and TWTR.  Before taking any action and remembering how long I have been with said names, I took my person far north, deep into the Michigan bush where internet cannot be obtained.  From my perch atop the autumn trees the thought of giving ‘them’ my shares seemed a bit callous, like manually killing your prey when you can buy it from a farmer.

Now that call premiums have been cleared off the table slow game is back on the forefront.  Value is drifting higher as the market strings together three up days.  Stay nimble as we head into resistance.

Nasdaq futures have seen a slow in pace as we enter the new week.  Last week (OPEX) featured the highest volumes both in regular session and globex that we have seen in several years.  As  we embark on a new month of risk, activity has slowed.  Since opening for trade Sunday afternoon the price of the Nasdaq front month (December) futures contract has traded inside of Friday’s range suggesting overnight/weekend participants accept Friday’s range as balance.  The session kicked off with a low volume rally which slowly evaporated through the duration of the evening.  The economic calendar was quiet overnight.  We have China GDP numbers out this evening and USA CPI on the docket for Wednesday premarket.  Earnings season is ramping up throughout the week as well.

The market became a bit illiquid last week as participants aggressively sold equities.  Price action ‘broke loose’ which is a phrase we often use to describe the price action following a break from compression.  In these conditions, the quest for value and balance go out of whack and we are offered a rare opportunity to see real human emotion play out in the tape, often fear.  The event leaves a ripple in our environment and is likely to continue affecting the behavior of prices going forward.  Remember, price has memory.  Fortunately, the action managed to form brackets last week—guideposts we can use to assess price and volume going forward to determine if either the buyer or seller is gaining control.  I have noted these brackets on the following daily chart.  Note how prior zones of support and resistance are transformed into their counterparts:

Given the progress of sellers over the last 1-2 weeks, the micro composite from Wednesday/Thursday, and especially given the amount of volume which came in on the downward action, my short term bias is medium bearish.  You can see three volume profile print-types: the large composite on the right (months of volume-at-price), the red and green ‘micro composite’ facing the opposite way of all the others, and the daily volume profiles.  Each tells me a different story.  I have noted the price levels I will be observing as opportunities on the following 15-minute volume profile chart.

I am looking to work out of some of my longer term holdings here, and not buying into this move.  There are strong bounces, there may be more strong bounces, but I am shifting slowly to the tall grass.  Don’t love them, not even sweet baby Elon.

Markets operate on fractals which occur on all timeframes and they look the same only the scales can be much larger.  One of the predominant characteristics of the market is to ‘check back’ or revisit a zone where a significant event occurred.  Once the Nasdaq broke loose to the downside its first stop was the major resistance zone we printed back in March 2014.  As we approach US cash trade, we are seeing some follow through from buyers who showed up at this level.  Volumes are still running on the high end in the globex session, but, as you might imagine, they are lower as we head higher.

Giving boost to index prices is speculation of additional stimulus according to many of the media outlets.  However it makes more sense to attribute this move to the oversold conditions which have persisted in the market since last week.  The issue we have is how long the market stayed oversold.  This type of long duration oversold event often precludes a shift in sentiment overall.

Investors are looking for this round of earnings to build confidence in the marketplace and thus far results have been mixed.  The earning season is only beginning however.  We have U of M Confidence numbers at 10am and an otherwise quiet economic calendar.  Also, although it might seem a bit trite, I continue to monitor the trade in NFLX after its jaw dropping 20% move to see how the market digests it.

I have noted the ‘check back’ on the following chart, and also where we are likely to run into some sellers.  These are very broad brush strokes which we can refine on a shorter timeframe, and then refine on a shorter timeframe, and then refine on a shorter timeframe to day trade.  However, stock traders and swing traders/investors should be keen on these zones:

We are currently trading on the upper edge of yesterday’s range and it will be important to observe early on if buyers reject yesterday’s range.  If they do, we are likely to explore higher which puts prices into an air pocket which might lend to upside acceleration, especially if shorts begin to cover.  You will also notice the 2-day balance we formed on the lows featuring a clean taper bottom and a centralized VPOC—lovely symmetry.  I have also noted the price levels I will be observing:

Volume differentials are still running above average but there is a distinct change in the pace of market movement today.  It helps that the day is moving higher which tends to occur at a slower speed, however, on the net we are seeing smoother rotations in the index futures.

The opening was very important this morning, more than any other day because of the location.  When participants started trading this morning it was near the prior day lows.  I was keen to distill who was dominating the tape early because it had heavy ramifications for today’s trade.  Fortunately the buyers made their actions very clear, and continue to do so throughout the session. This can be seen as buyers ‘holding the mid’ and printing higher highs and lows.

The higher prices are motivating sell flow back into the tape after they sat back for most of the session.  I have shortened the duration of my stock trades significantly.  However I saw enough evidence today to increase long exposure a bit after sitting through the biggest wave of selling seen in years.

Oil appears to be the culprit, and also the opportunity zone.  The long trade in energy might only be for the bounce here, but even that little move higher has opportunity to manufacture some wins.

All together, I am sticking with the less-is-more policy, managing risk via scales, and looking for opportunities to raise cash, slowly.

Option expiration is upon us.  It has been a fast month, and soon these dead calls will vanish from my book.  Good riddance and RIP to – KORS, Z, VJET, AMZN …you have each taken a percent of my infinity pool fund.  Damn you all to the depths of an Opera guest chair.

The rub?  The market is too out of whack to take option trades now, so that risk cannot be recaptured for now.  Instead I am swinging slow, via the stocks, and that all depends on whether BABA stocks getting the whack-a-mole treatment. Each stock I currently trade requires my full love and affection, no side action, so I am keeping my position count limited.  After all, a trade is a trade and they are all sacred.  Don’t just toss you money into a flaming barrel of garbage for the thrill of seeing the flames rise. That is selfish to the laws of the universe.  Honor thy stock gods.