Finding The Swing Low

Nasdaq futures caught a bit of a pop this morning right around the time European Central Bank released their rate decision which continues to be in line with expectation.  About half of the fast gains have since been given back, and the sell flow began at 8:30am when ECB’s Draghi began his press conference.  At the same time US Continuing and Initial Jobless Claims were released.  Continuing Claims were worse than expected and Initial Claims better.  The rest of the economic docket is open today aside from a 10:30am Natural Gas report energy traders will want to keep an eye on and Consumer Credit at 3pm.

The intermediate term timeframe is flirting with the idea of going seller controlled.  We are almost developing a pattern of lower highs and lower lows.  To negate this developing process, buyers need to step up and establish a higher high very soon.  If they can hold the LVN at 3865.25 it would be a productive start to the process.  Even if they cannot press up and out today or tomorrow, by simply slowing the action down they would fortify the idea that intermediate term balance is still in place.  I have highlighted key intermediate term price levels below:

Buyers are still on their heels, and without stabilization soon we risk another acceleration of price discovery lower.  The question I constantly ask when the market is working on building a swing low is, “Is the market done finding buyers?”  We saw a sharp responsive buyer off the open yesterday morning and the action saw continuation into the afternoon—initiative buying coming in after the fact.  Once a strong bid is established, this is what we see, the action process goes in the other direction until it is done searching out a seller.  The process forms value.  If the conviction buyer does not show up to defend her responsive buying yesterday morning, that could be a shift in short term sentiment.  I have highlighted the key price levels I will be monitoring early on the following market profile chart:

Stay sharp!  The action today felt like a lull into complacency.  A sort of lullaby to sooth the beast before driving a lance down through the spine.  Of course, we do not trade feelings.  We objectively observe the market and its two pillars—price and volume.

It was unfortunate I was unable to prepare hypothesis before today’s session.  An antivirus update tossed my machine into disarray minutes before the open.  As enticing as this may have been to trigger anxiety or stress given the gap below yesterday’s range and my nearly 100% long book, I simply rebooted my system and brought my systems back online while enjoying my chicken and beans.

The white linen suit I have worn throughout this warm earning’s season was sullied by my decision to hold a runner in GRPN calls.  My angelic beach gown now has a mustard stain on the right breast because I gorged on my hot dog without proper planning.  I feel no shame from such actions, only a push to stick razor tight to my plans going forward.  Every deviation from plans hurts me.  Each action you take should be without impulse and toward a greater purpose.  Act not on whim.

Two times this week a rumor has spiked one of my positions.  Both instances are positions I have earmarked for September, a future so distant I hardly give it much thought in the present.  Both times I have laughed at such rumors, watched my gains fade off, and gone on with the day as if nothing has changed.  I will let you in on something…NIOTHING HAS CHANGED, yet.

Change is a force consistent in nature.  Change is how you came into existence, yesterday a blob of semen, tomorrow embalming fluid, ash.

I will see both Whole Food and internet radio site Pandora to much higher prices.  How high?  $42.25 for the former and $28 for the latter, to start.

This big book is an honor to manage.  Its many moving parts invite the mind to work and decide.  Yet I desire to hit some targets soon, for the weight of it all is impressive.  This too is temporary.

I offer the following serenade to the stock gods, may her soothing voice bring forth the fate of sellers no sooner than is proper:

Futures are lower overnight on above average volume.  The largest impulse rotation occurred around six AM and futures have since shown little bounce.  The price action was able to take out prior swing lows from August 1^st.  Swing highs and lows are rarely set during the globex market, thus we might expect these overnight lows to be tested once the cash market opens.

The economic calendar is quiet for US trade mostly, however we do have Crude Oil inventory data out around 10:30am.

Prices are currently trading outside of yesterday’s range which suggests participants rejected the aggressive balance formed on Monday and Tuesday.  The question we must be asking ourselves throughout today is, “Is the market done finding buyers?”  If we do not see any strong reaction from buyers today, then the market is likely to continue exploring lower until it finds such a demand.

I have marked up the intermediate term prices on the following volume profile chart.  We are trading down in the thin tail of an intermediate term balance dating back to the start of July.  With prices making news lows early today, the argument can be made for a shift into intermediate term seller control.  However, we should first observe how we open, see below:

Finally, I have marked the short term levels I will be observing on the following market profile chart:

Of all the day types formed by the natural ebb and flow of market participants, no type elicits strong emotions from traders like the Neutral Day.  And when you examine the formed structure and think about it rationally it makes sense.  Keeping a cool head during a neutral print often affords you an opportunity to enter long or short at favorable intraday prices.  It can also mean the difference between showing some brass when you need to instead of capitulating at the worst possible moment.

Yesterday and today were both of the neutral variety.  Yesterday was an opportunity to squeeze out the shorts before heading lower, and today might have been the markets best shot at shaking off some weak longs before heading higher.  This much is for certain—two neutral days, printing opposite one another in unison is a powder keg of potential energy for the next move.

I am nearly 100% long into what may be the biggest move of the summer, sword out and shield on my back.

If you want to learn more about days types, in particular the neutral print, stay tuned, for I have something very exciting in the works.

I continued my efforts to add value on Twitter today via my handle @TwoSmuth. Why not throw me a follow or retweet? See below:

When the NQ and ES both go neutral, don't chase your own tail into the hole

— Raul (@TwoSmuth) August 5, 2014

No complaints about "rigging" when the tits are ripped off this selling. You have been warned.

— Raul (@TwoSmuth) August 5, 2014

Be sure to pay close attention to tomorrow morning’s context read, it should be pretty clear where the battle lines are.

I just went ahead and bought a small Facebook Yolo to put a cherry on what may go down as the most concentrated bet in Raul’s history.  Many a time I have put myself out on a limb, gathering every social media company into my portfolio only to receive the most devastating drop kick to the gut a man can receive.

This time is different.

The risk cycle has swung in our favor, and I intend to milk all of the most bountiful cows at once.  Bear with me…

I have risk in YELP, P, TWTR, WB, SINA, WUBA, a small GRPN earnings piece, and FB

This cannot and will not last long, mind you, as the logic of the universe will not tolerate such lack of diversification for very long.  In fact, it may only last a scant day.

When you are performing such a feat you must embrace the very inherent risk associated with such a maneuver.  For the duration of this trade I have stopped trading futures.  My focus is on all of these charts next to the Nasdaq and that is too much to actively manage for me.

Be sure to stop by for updates, and please do not try this at home unless you have a solid idea what you are up against.

The buyers got a bit ahead of themselves early yesterday afternoon when they pressed prices up through the highs. Once doing so, they uncovered a strong responsive seller who patiently let price come to her and then erased over 20 points of progress in the final 30 minutes of trade lasting from 3:45-4:15pm.  That pulse of selling carried over into the overnight session where the brief pop in prices after weaker-than-expected Chinese PMI data was faded and prices continued drifting lower.  On our economic radar for today’s trade is ISM Non-manufacturing composite at 10am as well as Factory orders at the same time.

The intermediate timeframe is spreading out like discovery is taking place, but as a pile of volume-at-price it still resembles balance.  The balance we can observe dates back to the start of July, has a low slung VPOC just below our current prices, and we are currently muddling through the thick value zone.  I have highlighted the key price levels below which will serve as sign posts as the story unfolds:

You can see the intense indecision on yesterday’s market profile which has long tails on both sides of value.  This is the nature of a neutral day which has a real lack of directional conviction.  I have noted the price levels I will be watching early on below:

The sublime harmony of mathematical precision was your remedy for avoiding Friday capitulation.  It is true, a bounce showed up today without much persuasion, but does it carry enough energy to explore higher in a quest for value?

It seems we have uncovered sellers late in the session, sellers who are rather convinced of their correctness.  However this selling behavior too can be attributed to logic and reason.  Our Nasdaq index as well as the S&P entered neutral territory early this afternoon.  I had a likely expectation for trade to return to the mean (today’s VPOC at 3886.75) before we head elsewhere.  Thus when a certain passion burned in my soul to increase my long exposure this afternoon, I quenched my mind with a much needed nap.  We closed the market down above the midpoint, barely, suggesting a slight upward bias into tomorrow’s trade, but not nearly as vigorous as one would expect if the neutral day had printed a close near the extreme or HOD.

For you Chinese burrito fans, bear in mind their PMI data is coming out just before 10pm.  I will not be watching said news but rest assured I will be keen on the overnight reaction to it come morning considering I hold a flaming hot sack of burritos including:

WUBA, SINA, WB (WB and SINA…oh boy), and VNET

We must too consider how Chinese PMI may affect X, as USA makes the hottest steel on the block, something China buys by the shipload.

If it is my fate to rise in prominence on the financial blogging circuit, then I must be a steward not only to the fine people who visit our halls but also to the public.  It is what that in mind that I have trickled back onto Twitter.  My goal is quality tweets, never wasting a word but providing actionable calls.  Tell your friends about @TwoSmuth, the handle not-so-easily associated with yours truly.  I put out a gem today:

Great spot to buy some $WFM if you missed the post earning's firesale. FD: Long

— Raul (@TwoSmuth) August 4, 2014

If you care to do so, put that timestamp next to an intraday WFM chart.

I couldn’t script the morning’s price action in the /NQ better with a crystal ball. My primary hypothesis played out to near-perfection.  You have no idea the joy this brings me.  This is a methodology working after tens of thousands of hours at work.

Finally, I gave myself time to ride through the lazy month of August when I purchased a position in Pandora.  This is an internet radio station, something that used to hype up my person all sorts of ways in my early blogging.  Now it is simply another attempt to make a few bucks on a little pop.

I BOT more TNA with some sharp timing.  It was a good day.  Let’s stack up a few good days of diligent execution, shall we?

The economic calendar is quiet to start the week and many of the headline companies have already reported earnings.  Thus much of what has been made known is public to the market and the market is tasked with establishing value according to these facts.

The Nasdaq has gone lower for two sessions after balancing out near annual highs.  It carried some major speed to the downside and the selling managed to recapture nearly all of the progress made in July.  Around lunchtime we saw our first signs of responsive buying significant enough to stick around for a few hours.  Futures continued drifting higher overnight and as we approach cash open we are set to gap higher by just about 9 points.

I carefully reviewed the current intermediate term balance and highlighted the key prices levels within this balance below:

Furthermore, I have highlighted the prices levels I consider in play early on using the following market profile chart:

See the below comments for hypothetical trading scenarios as well as intraday updates.

Expectancy is one of these trading concepts that rarely receives a thorough explanation on the web because it is not very sexy.  However trade expectancy and position sizing are two of the most important pieces to successful trading.

I am not preaching this lesson from the pulpit, high atop my cloud of mastery and divinity, but instead from the ground, bare foot, with the purposeful intent of advancing our trading abilities.  That is my disclosure before you view my very humbling July trading expectancy.  See below:

As you can see, I operated a net losing operation trading futures in the month of July, and expectancy took a radical turn for the worse last week. I will not begin to interpret this data, but instead will use this very unsuccessful data in our lesson today on expectancy.  Let’s look at how expectancy is calculated:

EXPECTANCY = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

The very simple goal is to trade in a way that produces the largest expectancy number possible.  It only takes some basic algebra to understand how to affect the outcome of this formula—you need to make the product of the first set of parentheses larger than the second product.  We have three independent variables:

Win rate

Average Win

Average Loss

Therefore we have three areas available for improvement.  We can increase our win rate, increase our average win, or decrease our average loss.  (Simple, but not easy)  If you start trading too tight in an attempt to decrease the average loss, then your win rate will tank and you will miss out on otherwise good trades.  If you reach too far for bigger wins, then you are more susceptible to general market conditions, where price can stop working in your favor at any time—this is the nature of markets and why we spend much of our time studying the pillars of continuation, price and volume.  Finally you can add filters and qualifiers for taking a trade with the effort of only taking the most “sure” trades.

Once we have an actual expectancy, we can calculate how we are likely to perform.  Let’s run my numbers last month to demonstrate the concept:

Average July Expectancy = -1.16 ticks

Average Trades per day = 9.6

Trading Days in August = 21

Expected ticks earned (lost) = -233.86

As you can see, this is a tick losing enterprise, and without any adjustments this approach will lose about 11 ticks a day on average.

You can perform this basic math with any trading approach to see how your strategy fares.  And you should.  As a benchmark, the elite futures traders on my timeframe, the best of the best, have about a 1.5 tick expectancy.

If you are calculating expectancy on a stock or option trading strategy, it will usually make more sense to calculate your expectancy on a dollar basis as opposed to ticks because different stocks carry different daily ranges and your position sizing will adjust according to the dollar value of the instrument.  Once you determine the expectancy, you simply roll it out on the # of trades you take per month.  As enticing as it may be to take more trades using a positive expectancy method, BE SURE TO KEEP GOOD STATS, because you will likely see yourself deteriorating that expectation unless you keep your standards up.

Stay classy out there, and keep your expectancy on the uptick in August.

I have not been day trading the Nasdaq futures today because I have enough on my plate with this big old book of leveraged longs.  Unless we plunge again into the bell, I will continue laying on this bed of nails, staying very still.  There are three primal instincts which might trigger when you body or mind perceive danger—fight, flight, or freeze.  The market can indeed hurt me, financially, but beyond the confines of money it has no power over me.

All we can do is formulate a plan and be grateful to execute said plan with purpose.  Becoming mad at the market or harboring negative emotions toward the way your favorite stock is trading is a recipe for stress which can snowball into anxiety and negativity.  It won’t change anything, your positions certainly will not behave any differently.

I have three things going for me as we wrap up the week:

1.  There are signs of excess at the lows in the Nasdaq.  This is shown as a buying tail
2. The PPT is still oversold (this has already been made public)
3. Mutual Fund Monday – maybe fund managers would prefer to wait out the weekend given the negative news cycle.  That is fair. However, they have money to put to work, I think, and they will begin doing so Sunday night/Monday.

Plus look at this electric car stock ripping–Elon was a stud yesterday evening, fielding one question after another with fluidity.  The best part was when he told everyone they’re not showing all their cards this time.  There will be wonderful progress taking place inside the gigafactory walls and we can only wonder what is in store for the future.  There is still a bid for growth, in short, despite Elon telling Wall Street he is holding back information.

I am still taking Tina out over the weekend, aka TNA, she will be my method of playing this PPT signal.  A few of my options positions have been rendered nearly worthless but others still press on.  I had a read on the open which suggested we would drive higher all session, thus I YOLOd some PCLNs early.  It was a donation to the premium salesfolk.

Stay sharp this weekend, cut drinking and other pollutants off my midnight Saturday to ensure a full recovery for Monday trade.  And shave your face.

I will have some theory up over the weekend for anyone who wants to use their brain.