Balance Can Be Bumpy

Nasdsaq futures are up in initial response to a weaker-than-expected NFP data point this morning.  The news sent the dollar lower, treasuries higher, and equity prices to their high of the overnight session.  As we approach cash trade, there are also unconfirmed reports of a ceasefire protocol in The Ukraine.  The initial reaction to any sort of economic figure or news event is often difficult to glean insight into the auction.  You are usually better able to observe the reaction to the initial reaction.  Developing…

The intermediate term is balanced after trending higher for much of August.  Balance can be challenging to trade.  The risk you face is chasing longs up into the upper boundary, stopping out in the lower boundary, then going short into the lower boundary, only to again stop out somewhere near the mid.  Or you can stick with one side, wait for resolution, then adjust accordingly.  I have marked up key intermediate term prices on the following composite chart:

You can see how the pace of trade accelerated during the last two sessions relative to the tight, small profiles to the left of them.  The environment is improving for trading the Nasdaq futures.  I have noted the short term levels I will be observing on the following market profile chart:

The past two sessions have had a certain way of knocking me around a bit, but overall you can see what is occurring here.  There are macro currents sloshing around, big callers, big ballers positioning themselves into the end of Q3.  This is big money and it pays to stay out of big moneys way.  Better yet, join them.

Tomorrow morning we hear the monthly NFP data.  This number is one of the primary indicators The Fed is pinning their decisions to, or so they have said in their pressers and meetings.  Thus it appears some positioning ahead of that number is occurring.

The action is fast on the Nasdaq, and that can be a bit intimidating, but what has it done?  We are still in balance up here.  We had two down days after about fifteen up sessions.  And the kicker about today?  Value migrated higher and never followed price. Look at this:

I did very little today.  Less consistently proves to be more in this elevated tape.  I tried a PCLN day trade using some weeklies, it did not bounce as expected and I pulled back some of the premium.  I also bought some FEYE risk, short dated to next week.  The internet is a wild place and your ass is liable to end up on 4chan or reddit unless we all surrender to the might powers at FireEye, Barracuda, Splunk, and other dastardly named companies.

Thus I am long risk elements, without protection into 8:30am tomorrows event.  Anyone who brews popped corn and eats it at such an early hour is unfit to discuss matters of finance with me.  We will be enjoying poached egg in a cup and water.

Hasta manana

http://youtu.be/bkZZo0XSm5s

Go Pro, one of my investments, is under pressure this morning after being downgraded by J.P. Morgan.  I am not caring so much, price target for GPRO is $72.

Nasdaq futures are up on overnight after starting out rather weak when trade initially opened in Europe.  Traders’ attentions were focused on the Euro Zone this morning, where we were set to hear from both the Bank of England and the European Central Bank (ECB).  The UK left their rates at historic lows and will remain steady with their asset purchase targets.  The surprise came from the ECB who dropped their bank rate 10 basis points to 0.05% as well as decreased their deposit facility rate to -0.20%.  The news sent the Euro dollar falling, the US dollar rising, and US equity indexes higher.  We also saw initial jobless claims at 8:30am which was a bit higher than expectations.

Thus far, the net result was about a 25 point range on normal volume in the Nasdaq globex session.

At 10am we have ISM Non-Manufacturing composite which is listed as a high-impact event.  Energy traders will have a whole slew of oil and gasoline data to digest at 11am, and there are some Fed speakers after the market close (no Yellen).

The intermediate term has come into balance.  The balance spans 9 sessions and can be seen on the following chart.  Below this balance the volume composite is very sparse, and prices below about 4050 are susceptible to fast moves.  However, above here, we are likely to see the balancing process age a bit.  See below:

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

We observed a fairly strong bit of selling this morning in the Nasdaq, possibly fueled by the very weak day seen in AAPL.  There are also several early breakouts fading throughout the stock complex.  A bit of a rout is reasonable given the elevated price levels of late, the key however is maintaining some semblance of method to the tape as opposed to panic-type selling.

With that thought in mind, I have mapped out a hypothesis of how I envision the next 2-3 days to trade.  This is not fact, this is not prediction, it is merely a template to compare to how the tape actually plays out.

The Nasdaq futures are up overnight after printing a normal range on slightly above average but normal nonetheless volume.  The premarket economic calendar is empty but at 10am we have US Factory Orders and the Bank of Canada rate decision.  Later in the afternoon, at 2pm, The Fed Beige Book will come out.  After hours tonight the Bank of Japan is set to release their monetary policy statement and early tomorrow morning there are several central banking activities to keep in mind from both The Bank of England and the ECB.

We discuss day-types often and their implications.  Although yesterday was a normal variation with range extension lower, a day which normally would suggest seller control on the session, you have to be aware that none of these market profile terms are concrete.  They are simply ideas for us to assess the auction and who is participating and who might be in control and how good of a job they are doing.

Yesterday we nearly printed a neutral extreme to the upside.  The afternoon rally was well timed and buyers were able to sustain their push into the bell.  Their force was not overwhelming enough to press through the high, but the high on the session was of poor quality—another feather in the bull cap.  Conversely, the taper on the low of the session was clean, the rotations lower were smooth pushes lower as well, nearly perfectly compliant with a wave 3,4,5,a,b,c type reversal.  It was fairly clear by the end of lunch that the market had done a good job finding a buyer and the auction could start anew.

This is all hindsight.  What the market has done.  What else has it done?  On a larger timeframe we pressed higher through most of August, based out to end the month, and made a fresh thrust higher to start the month.  The beginning of the month has slightly bullish skew for equities, therefore the real intermediate term assessment takes place after 3-4 sessions.  For now, I have noted the key composite levels below:

The market appears to be keen on trying higher.  Over the last week volume has been stronger on green candles.  As far as price history goes, the Nasdaq composite overshot the 14 year gap from 2000 and is now in a bit of a fast zone from back in the dot com mania.  The market appears to be trying to find a seller up here by exploring higher.

Finally, I will be using the following market profile levels to aid my hypothesis process in determining what the market is likely to do from here:

Money has been flowing toward the marquee momentum stocks to start the month.  The Nasdaq is a touch higher after finding a responsive bid.  The Nasdaq has been hesitant all day to play along with the S&P and Russell weakness.  Instead it is flexing its apple bottom and holding the weight.

I have done little aside from observe the markets very methodical movement and buying some GOGO.  I am watching my investments perform well to start the month which are allowing me to hit the ground running.

It has been summer-like trade since lunch.  As you were.

Nasdaq futures turned in a relatively normal session overnight after drifting higher a bit during the shortened Labor Day session.  As we approach cash trade in the US the Nasdaq futures are trading up about 7 points.

The only major economic release for today is slated for 10am when ISM Manufacturing and Construction Spending data are released.  Looking out on the week, we have Factory orders and The Fed Beige Book during tomorrow’s regular session.  Thursday we have an ECB rate decision before market open with a Draghi presser and US Jobless Claims.  Thursday we also have ISM Non-Manufacturing composite.  And finally Friday before market open we have Non-Farm Payrolls and Unemployment stats premarket, arguably the only economic data point worth observing aside from The Fed.

On a long timeframe, looking at the monthly volume profile prints, we can see how much progress was made during August.  Much of the thin profile makes sense if you consider how well the prices we auctioned back in July.  However some prices received very little consideration and might welcome a retest at some point in the month.  See below:

Looking at the intermediate term, we can see the market beginning to come into balance although buyers still control this timeframe.  The value migration higher began to slow last week.  Overall the structure just below current prices is well-auctioned and likely to provide support in the short term.  If we push down through it however, it would then be considered an overhang of supply.  I have noted the key intermediate price levels below:

Finally, I have marked up the market profile with short term levels I will be observing today.  One piece of context which gave me confidence to press long through the weekend was the high on Friday.  This was a prime example of a poor high, one vulnerable to be taken out.  I will likely merge the small Monday auction into Friday’s profile, but kept them separate for us to observe the poor high:

Somehow my atomic alarm clock with battery backup fails to wake me at my customary time.  The iPhone backup chimes are muffled after falling off the bed and under a pile of blankets.  The air conditioning coil froze into a four inch block overnight and the house is a sultry eighty one degrees.

Forced to forego my methodical morning, I opt for a glass of water and a slice of untoasted bread smothered in ghee and almond butter.  I take said rations via tray to my desk and spill a bit of water on the mouse.  The mouse is fine but all the signs are there, it will be a day determined to challenge.  After taking my first bite of bread I power up all three monitors and accidentally smudge peanut butter on my second screen.

My eyes struggle to focus on the screen because I have slept with my contacts in by mistake effectively caking my eyeballs with thin plastic sheaths.  Nasdaq futures are deep in the red, down over 45 points after printing an abnormal 60 point range.  I cannot adjust my chart to show current prices until I wash the nut butter off my sticky hands.  We are off the lows which are another 10 points lower.  My intermediate term composite tells the story, it looks something like this:

Rushed, I mark up the market profile levels in haste and struggle to locate all the key price levels from back on 08/22.  I barely have time to write my hypotheses and hit send on the hypos as the opening bell sounds.  Just at that moment, my secondary computer which houses key intelligence including news feeds, The 12631 power group, The PPT, twitter, blogs, and stock charts forces a shutdown.  I overlooked the 15 minute countdown to finish installing the god damned latest Windows 8 update.

Over the next 15 minutes, while the computer slowly reboots, the market open drives lower.  The order flow meter is screeching the whole way down, my portfolio is a sea of red, down well over 4% by now, and the overnight low has been breached, sending us into the land of low volume pockets below—levels leap frogged in the preposterous gap-and-grind higher swing.  I have no time to scan the week’s economic calendar and miss noting the ISM manufacturing number at 10am which turns out to be a reasonable excuse for another wave of selling to push into the marketplace.

Twitter announces they have prices a secondary offering, effectively shaving 8% from the share price overt the weekend.

By 11:15 the market is down 70 points and my book just a touch over six percent.  I am forcing myself to ignore the empty pit that is my stomach, foregoing nourishment and staring like a deer caught in headlights.  I am wearing purple underwear, why the hell am I wearing purple underwear?  Of all the days to wear such royal garments, gluttonous fool.

Famished, I react and throw on some risk, more than intended because panic has set in and all planning is now subject to abandonment.  The plan is shelved for reliance upon old fashioned survival hormones which are coursing through my veins.

Part of me wakes up and I step away for lunch.  I slide cold leftover meat off skewers while swilling down the lukewarm glass of water I never finished from the morning.  Still hungry, I eat a large plate of spaghetti and a piece of chocolate cake.  20 minutes later, I am clinging to conciseness after my spiked glucose crashes through the floor.

I nap, for the love of nourishment.

I wake, now 3:30pm and my book down just a touch over ten percent.  We snap off the lows as the President makes an impromptu announcement from the White House.  The message is obfuscated but mentions ISIS and we rally.  Emboldened and overrun with patriotism, I press more risk into any chart I can find.  I feel pretty good because the market is holding its snap off the lows.  In the final 10 minutes a real liquidation wave of selling swells into the market and takes me with it.  The Nasdaq has lost over 100 points of value and is now trading inside of 08/15’s gnarly neutral print.   I stop out my winning positions in a last second attempt to ‘right’ my ship, ignoring the new risk which has managed to lose forty percent of its value since the morning.

The market closes, I read philosophy books and eat McDonalds on the couch.  Unable to sleep, I make a third attempt to watch The Grand Budapest Hotel and fall asleep sitting up, fast food bag in tote.

For some awful reason you cannot seem to shake this song which is stuck and looping in your mind:

During the week long market profile webinar we talked about ‘the story’ and how when we choose to focus on the market activity in the context of an auction we react in planned ways.  As the market moves we can constantly return to reading context by asking ourselves a few questions:

• What has the market done?
• What is it trying to do?
• How good of a job is it doing?

These questions help us answer the final question which determines how we react, if at all—what is the market likely to do from here?

You truly need to see this in action, like seeing a big rotation and running through the questions real time, to see the effect it has on your mental vision.  You return to these questions, you use market profile as a tool for seeing the auction, and the process provides a logical decision making process.

Probabilities can be just as logical a basis for decision making.  They are statistics derived from past market behavior and it is reasonable to include them as part of a decision process.  For example, if the overnight low breaks 89.52 % of the time and you have entered a short position which is working in your favor and is within a few points of the overnight low, then pressing for at least a 1-tick break of the overnight low makes sense, especially if the session has matured a bit, increasing the probability of a break.  These little inches we fight for add up to miles when it comes time to calculate expectancy.

Relying on these foundations (logos, as the Greeks called it) for trading will yield better results and a more objective eye.  Imagine your statistic does not fulfill because that is the simple nature of the markets.  This resistance to the laws of large numbers will speak to the context too.

Enough emphasis on why statistics matter, yes?  Without further adieu, I have performed a study on five years of trade in the Nasdaq futures.  The raw data has been pulled from the IQ Feed servers via their symbol @NQ# which is the continuous contract.  Some key points:

• Overnight high/low break occurred 89.52% of the time, with 73.28% of breaks occurring before noon
• The normal volume on an overnight session is between 17-39k contracts
• The normal range of an overnight session is between 16-46 points