USA indices are up slightly during the globex session, despite notable weakness in the Asian markets. The NASDAQ continues to lag the S&P, The Dow, and the Russell index.

The sell flow which entered the market last week was strongest in the NASDAQ where sellers can clearly be seen reacting to perceived premiums. Their actions in the market were dynamic enough to leave selling wicks on the market profiles and also effective in driving value lower. The 24-hour profile shows this action mostly clearly, with selling wicks clear. I have highlighted these wicks, as well as two scenarios I envision for today’s trade in the /NQ_F, our futures contract for tracking the NASDAQ:

It is important, especially if you are participating in the financials trade, to keep an eye on the intermediate-term balance in the S&P 500. I have highlighted this balance on the following /ES_F chart, our futures contract for tracking the S&P 500. We can monitor the price action near these balance extremes to gauge if other time frame (long time frame) participants are increasing activity in our market. Note: they “should” be more active, as the holiday trading season comes to an end:

December 20th was a big day on the S&P 500 (aka $SPX aka /ES_F) where price extended upon the large trend day only two days prior. The events of December 20th set the stage for a holiday drift of benevolent proportions.

Then yesterday came and we erased the entire drift in one foul swoop. Or did we?
The balancing process is an interesting natural phenomenon driven by the collective actions of all market participants. Yesterday the sellers were in control but intermediate term we are working through a balance.

This balancing event is occurring at very elevated prices which should bring the trader a bit of caution for continued liquidation. I compressed the balancing action into one profile this morning on the S&P 500 because the resulting picture is rather interesting and gives us a solid bit of context to frame our minds around. Put simply, we’re stuck between two humps…until we aren’t:

Overnight our range was larger than recent past where the action has been benign. Sellers could be seen early in the evening beating price lower at 1829 and producing a wonderful rotation down to 1820.50. This is where we can see the intermediate term balance/auction come into control—buyers defended the price zone and their demand was strong enough to propel price a tick above yesterday’s RTH range.

The bad news for bulls is we typically do not set swing high/low during the overnight session. Thus the downside is vulnerable. The good news is we are seeing healthy market activity and participation by both parties.

I have highlighted a few levels I will be keying off of in the NASDAQ today on the following market profile charts:

The index futures are currently trading well outside of yesterday’s range.  The S&P futures are set to open nearly 10 handles higher.  This is pro gap territory where attempting to fade the price action for the gap fill down is more difficult. 

Turning our attention to the NASDAQ, via the /NQ_F, we can see the market printing two distinct distributions overnight as price drifted higher. 

Intraday trading in this large gap environment can be difficult, but it is best to choose one side and stick with it to avoid getting chopped.  The opening type will help shape this bias.  Should price drive higher or lower off the open, we can gather who is in control of the action.  A sideways auction with little given back to the downside would suggest the market has accepted the overnight move and to play the long side, for example.

I have highlighted a few levels of support, as well as a few scenarios on the following market profile chart:

The NASDAQ futures market showed a bit of follow through on the behalf of the sellers, where price took out our Monday morning low.  However, the probe lower, likely algorithmic in nature, was met with a reactive buy force and price swiftly auctioned back into yesterday’s value range.

Conversely, the SPX futures made no new low overnight, instead continuing to coil.  There has been a subtle bit of relative strength exhibited by the SPX verses the NASDAQ composite these last few days including yesterday where we printed a normal day.  In market profile theory, a normal day features a dynamic open, likely driven by a longer timeframe trader entering the marketplace.  The range of the first hour is not breached for the rest of the session.  These are very rare, occurring in the SPX only five times in the last six years.  Oddly enough, we printed a normal day in the SPX on Friday and Monday.

The action suggests coiling and this uncertainty is suitable for our current situation.  We are nearing the close of a very strong year in the markets.  Many are likely closing their books early to lock in the gains, yet we have strong pockets of momentum in select industries.  The Fed, our current market moving exceptional, is experiencing a changing of the guards from Bernanke to Yellen and we have taper talks given the recent progress in the labor markets.

The markets have two choices today.  Either continue to coil ahead of Wednesday’s Fed announcement or move away from here.  I have bracketed both the NASDAQ and the SPX today as guideposts as the day progresses.  Keep these brackets, or support/resistance clusters, in mind today as the day progresses to measure any progress made by the buyers and sellers.

I have also highlighted a few scenarios for the NASDAQ using the 24 hour market profile chart:

Note:  All price levels mentioned going forward will be in reference to the March contract. 

If you were just waking up to the market, you may be unaware of the wild ride index futures took overnight.  The S&P printed over a 20 point range in the overnight session after reversing early weakness.  The Nasdaq traded over 40 points in range.  In short, last night featured violent indecision of the overnight/low volume variety.

As of 8am, the S&P is set to open above Friday’s range which tells us we are in a high risk/reward environment.  The NASDAQ is not quite above Friday’s range, but is outside of Friday’s value which gives us a similar context to frame our day.

Early on it will be interesting to see if sellers can reject the overnight progress and press back into Friday’s value.  Turning our attention to the NASDAQ, we are opening in the slippery single prints from early Friday where sellers aggressively auctioned lower.  We may see a similar push from sellers early on and should monitor trade at 3461.50 which marks the value area high on Friday’s session.  Below there we have a VPOC at 3458 and a value area low at 3452.25.  Short sellers will be on the lookout for a rejection of this range as it may signal a bullish reversal is materializing.

I have noted these levels, as well as key resistance points and a few possible scenarios on the following market profile charts:

The equity markets opened Sunday evening only to find buyers interested in increased exposure.  Since then price has behaved orderly, consolidating the overnight gains and positioning price outside of Friday’s price range and value.

Should prices on the NASDAQ composite sustain trade over 3511 into the opening bell, we are opening out of balance, and the risk of a violent move is high.  However, if I have correctly identified where were are currently trading within the sentiment cycle, we are deep in denial, which may produce muted trade.

The S&P is currently trading only two handles above Friday’s closing price which leaves the door open for a gap fill lower.  Early on, perhaps even pre-market, we may see sellers coming in to close the gap.  More important contextually than the gap however, is the low volume node we printed on Friday’s S&P volume profile at 1802.50.  This price level set value area low several times in November and on Friday the action from buyers was dynamic enough to leave a low volume, fast moving footprint.  Should the sellers quickly reject us back below this level and sustain trade for over an hour, we may be in store for further downside.

The NASDAQ is currently trading eight handles above its closing print showing greater strength early on.  I will be watching the overnight swing low at 3506.75 to measure bullish appetite early on.

Overall, the action looks ripe for a rally however it is paramount we stay objective in our analysis and accept and define price levels which may negate our thesis.  I have highlighted the low volume zone on the S&P on the following market profile chart:

The markets auctioned very methodical all week ahead of what is likely to be an interesting Friday.  We tracked the control of sellers which began on Monday and came into question Wednesday with a violent neutral session.  Thursday the market told us it accepted the current prices by balancing out inside of the large neutral day and is waiting for new information before exploring elsewhere.

Overnight the NASDAQ divided itself into three micro sessions by auctioning then breaking a bit higher, auctioning then breaking higher, and finally auctioning as the USA come online.  The action overnight suggests buyers have the early edge.  However they have also pressed us into very short term overbought conditions.

Taking a look at the longer term via value migration, you can see the relative strength of the NASDAQ verses the S&P:

Early on we have employment data which may better set the tone for our session, but the following reference points will still be relevant in determining whether the market is breaking out of balance to the upside or the downside:

The index futures are lower overnight, with the marquee S&P 500 weaker than the NASDAQ composite.  Early on the momentum favors the short side, especially given the gap below in the NASDAQ.  My expectation is for an early probe lower by sellers into the gap.  I will look for buyers about half way into the gap from 3475 to 3473.75.  Should they not present themselves, I expect trade down to 3472.25 (11/25 high) then 3469.25 (11/25 VAH).

At some point the gap trade higher may come into play, perhaps fueled by shorts in the hole.  The overnight gap higher target is 3483.50.  If the algorithms decide to run stops on any newly minted shorts, my algo upside target is 3489.50.

Long term auction is still in the control of the buyers but is aged.  Yesterday was controlled by the sellers, and overnight the sellers retained control.

I have highlighted the day how I envisioned it above on the following market profile chart:

The NASDAQ continued displaying relative strength verses the S&P 500 overnight, albeit mildly.  The composite index was able to make new swing highs during the overnight session where sellers were quick to greet the move.

As we work into the early hours of USA time, prices have balanced out and are slightly higher than last week’s close.

During today’s session, I am interested to see whether or not the lagging S&P breaks recent lows or instead continues consolidating/grinding higher.  Put quite simply, I will be monitoring the 1800 price level.  Should we sustain trade below 1800 for a prolonged period of time, I may reduce select long exposure.

I do not want to see the NASDAQ (as represented by the /NQ contract) below 3488 for a prolonged period either.

I have highlighted the levels I will be observing on the S&P today on the following market profile chart:

The indices experienced some selling early the morning and quickly reached oversold levels which are now in the process of working off as the United States wakes up.

Since our Sunday globex open, the S&P futures have been trading mostly flat in a very balanced and evenly distributed manner.  This makes it difficult to envision any specific scenarios for today because all of the distributions are complete.  Therefore we must focus our attention on the bracket extremes to gauge whether the market is coming out of balance and by which parties hand.

We are currently prices to open outside of yesterday’s value, but still within yesterday’s range.  If the sellers can reject our value area from yesterday, we may see acceptance lower which would suggest a change in conditions from this current bull brigade, a subtle shift we should be aware of should it occur.

I have highlighted key price levels on the following market profile charts as well as displayed the very balanced trade occurring on a 24 hour profile view: