Into The Gap

Index futures are trading up a bit premarket, CPI data just came out in line with expectations and brought in a bit of selling, however we still have almost an hour before the market opens.  Traders may have their eyes set on Wednesday, the day we are scheduled to hear from the primary market movers—the USA Federal Reserve.  They will be releasing the minutes from their July meeting at 2pm on Tuesday.  Before we open for trade Wednesday we will be receiving the Fed minutes from the Bank of England.  With earnings season winding down, these type of economic events will be what prompts movement in the markets.

The intermediate term volume profile has taken the shape of peaks and valleys one might expect when price discovery is underway, and that certainly appears to be the case.  The market is searching for sellers as the auction rolls upward.  The pace began to slow yesterday afternoon, however we did not find a selling response significant enough to be begin the process of balancing this timeframe.  Instead we are buyer controlled.  Price stalled at my first measured move target, however these prices are by no means science, they are merely Fibonacci extensions of our prior swing dated from 07/24 -to- 08/07.  It does tell me yesterday was a stop run because essentially this price level is where intermediate term short sellers might put their stop loss orders in.  If we exceed the second Fib level at 4030.50, and see acceptance, this market can go much, much, higher.  I have noted these levels and other intermediate term prices below:

Supporting the idea of a heady rally is the very long term perspective seen on the weekly Nasdaq Composite where price breached the 14-year-old gap I have been discussing.  The Nasdaq Composite is just an index, thus we do not have volume profile to observe, but the gap suggests similar behavior may occur.  This gap has over a 60 point range to the upside, see below:

Here’s the snapshot I posted last week if you want to reference the gap:

Yesterday we printed a P-shaped market profile which suggests a temporary phenomenon known as a “short squeeze” occurred.  When this formation occurs after a two or three day snapback rally inside an intermediate term downtrend it can often mark the end of the rally, a final squeeze before returning to the bigger trend.  However, in this case, where we are making new contract highs to start the week AND where we gapped higher, it does not carry the same implications.  It does tell us a squeeze occurred early in the session.  It does tell us fresh risk was initiated by buyers during the day, and it does tell us sellers did not enter the market in a meaningful way.  I have highlighted the prices levels I will be monitoring, as well as a few other observations below:

Many folks are having their last kicks with the kids and the sunshine before we hunker down and get back into the grind of work, school, and fall.  The market is behaving similarly, lingering up here at annual highs is a low volume float the likes of which occurs when very little gravitational pull exists.

This is price discovery, up like a balloon, down like an anvil.

The opposite is where the markets are the rest of the time, balanced, with a violent act of tug-of-war taking place throughout the day.

On these hot air balloon rides, less is more, the view is splendid, and there are only a few pieces to monitor as you enjoy your coffee or whatever else it is you do with your time.

I have done little today except buy some MBLY calls dated for September, the month we really go back to work.

The rest of my book is very long but not achieving targets just yet.  I will wait for said targets, even if it means taking on a hedge either today or tomorrow.

These are my only thoughts for you today, loyal readership.  The After Hours with Option Addict crew and I will be blowing the book open this afternoon and all week, digging into the fascinating topic of Market Profile.  A little summer school warm-up before these markets get serious again, if you will. There is still time to join in.  Please do, I promise to make this simple topic fun and engaging so you can add it to your trading repertoire.

If I hedge, it will be with TZA, and I will let you know.

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:

I haven’t made any trades yet on the session, and hopefully I won’t have to.  News sensitivity on OPEX is grounds for me to make trading mistakes, thus I will keep my distance until the bell.  We have room below wight this volume pocket still in play:

May you be safe and free from suffering on this summer Friday.

The market has been on a tear this week, and if you focused your energy and time resources on wrapping your mind around geopolitical conflicts and their effects on the markets, well, you may have wrongly positioned yourself ahead of this move.  There is no guarantee in trading, and there was no guarantee the consolidation would break higher.  There were clues…

The PPT flagging oversold

The NYMO hitting annual lows

The “excess lows” we printed in the Nasdaq

The constructive behavior of momo stocks

The natural flow of funds at the start of a month

And while these clues were building up, many of us built up longs and today I began harvesting my crops.  Harvest season is a swell time, reaping the sown oats and filling the tables with foods.  It’s a feast and famine lifestyle at times, this trading.  I still have some longs but I have reduced my exposure a bit ahead of tomorrow’s OPEX and perhaps one of the last fine summer weekends here in the north where the winds have already begun carrying a noticeable chill with them.

I would like to give a big shout out to The Option Addict, his call on X, a gain I just booked well over 1100% was a huge confidence booster while we navigated the curves of last week’s consolidation.  There may be some meat left on that bone, but I am more than satisfied with my portion.

Into next week, I like how WFM is shaping up and WUBA.  If it wasn’t for those pesky earnings I would like WB too.  I like the letter W, in short.

I will be away from my desk at the open again today not by choice but for civic duty.  Keep the below pocket in mind today as we trade.  This thin volume zone can produce fast price swings in both directions.  The early expectation following the trend day yesterday is some follow through.  This might be sold into shot term but look for clues of pressure continuing to the upside because there was a huge energy buildup before this move.

The upside discovery process taking place this week is being led by the Nasdaq.  Perhaps this is the reason why I have been successful this time around—I study the Nasdaq like an obsessed stalker.  There is an industrial reason why the Nasdaq is out performing both The Russell and the S&P.  The index is not bogged down by the lagging financials.  Did you know that?  The fact that no financials are housed in the Nasdaq is one of those little details that no one really emphasizes but is important to know.

You should never assume a detail to be too minuet, especially if it furthers your knowledge of a pursuit.  If you already knew this about the Nasdaq, GOOD, let’s move on…

Volume pockets, we love them.  Those unaware of their existence and location chalk up vertical moves to news events at best and often times other mental masturbation like manipulation or galactic alignments. We are trading inside a thin volume pocket today after over a week, about 9 sessions, of serious compression.  This pocket is likely to be traversed a few times, but right now the order flow favors longs.

My actions on this blog are for the explicit purpose underlying the ethos of this fine web domain, gregarious winship for the betterment of learning traders worldwide.  I used to pander for approval, panhandling for your votes and such, but since have focused on what I am doing and why I choose to do it and how it furthers my goal of being a champion trader.  I knew some of you might struggle holding risk through the weekend but that is exactly what needed to happen to have a sweet entry into this move that is currently underway.

All of that value compression last week built the energy needed to fuel this move.  The only question you should be asking yourself going forward is, “Is the market done finding sellers?”  Think about that question, find ways to answer it.  Look at the way a high is formed, for example.  Look at where the market is trading relative to the price action on our left and formulate an idea.  Then stick to it, you don’t need me or anyone else to be happy–you need a plan.

On the day I scaled off a few wins, bought some DDD next week calls and added some time to my bust WUBA long.

I see no reason to be overly concerned about this Nasdaq move yet, it hasn’t even pulled back yet.  We have no frame of reference until it does so, IMO.  We take this one day at a time.  And if financials decide to join the party, those C calls I bought yesterday are looking nice.

Stay sharp, alert but not tense.

You do not want to be short going into this pocket:

I will not be around at the open today (or tomorrow) nor do I have much time to address you, good readers of this blog.  Futures are up, the Fed is talking this afternoon,  and you only need to keep a few Nasdaq price levels in mind.  The Nasdaq is leading the tape, at least it was yesterday…these type of things change all the time.  This price action is the poster child of leaving balance but we need to sustain above 3900 and put your guard up if we trade sub-3886:

First off, I booked the rest of my TNA position today.  The position had a timer, and although I cashed out right about where we are closing today, I stuck to my plan.  There is a joy about sticking to the plan and doing your job.  It really is the only thing a trader should excite themselves about.

I also closed out my August YELP calls, pull in some of that premium.  It was the worst performer in my August book and earned a seat on the bench.

I called for the left handed relief of September C calls.  Later I bought some ZU as well.  ZU was a very dull chart today even while everything else behaved a bit more erratic.

I was concerned with the lack of follow through this morning.  We had a very strong push early, and it looked like prices wanted to explore higher.  When they reversed instead, I suspected we might flush back to the mean.  Later in the afternoon, when such a flush did not occur, when instead we formed excess lows, I put some risk back in place.  Simple, but not easy.

You can see demand exists at 3886.  Why? Perhaps last week’s short is clamoring to cover before the seams are ripped off this market and we bust loose.  See below:

Thus one could presume last week’s seller is currently putting a bid in this market.  Until otherwise noted, let’s push on him.

May you trade well, even if you are playing the other side of the tape.