Nasdaq futures are currently gap down a bit as we head into the final few days of trade in 2014. Volumes and range are both normal but on the low end of 1^st sigma suggesting participation is here today but perhaps a bit light.

Sellers managed to print the two major rotations of the session. It looks like a bit of follow-through on the late-Friday selling. Overall the price action was contained inside of Friday’s range.

The intermediate term is neutral-to-bullish. We can see the market coming into balance (overlapping value areas) with the exception of Friday when price went exploring higher.

The high of Friday looks a bit vulnerable even though the market found some sellers late in the session. That initial impulse of selling Friday may have already seen its follow through during our globex session.

Early on I am looking for buyers to push into the overnight inventory and close the gap up to 4311.25. If buyers can sustain trade above 4304.75 then I will be looking for a push up to test overnight high 4320.75 and beyond to the prior swing high up at 4323.75.

Hypo 2 is a push lower to take out overnight low 4298.25 opening the door to target the mCVPOC at 4295 and Friday low 4293. If buyers are not found here then sellers will likely target last Wednesday’s VPOC at 4290 then a closing of the Christmas gap down to 4281.50. Expectation is we find responsive sellers down here.

Hypo 3 strong drive up, take out overnight high 4320.75 early and target the 11/28 gap fill up to 4333.

I have highlighted these levels on the following volume profile chart:

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Good morning everyone. The overnight session has traded less than 3000 contracts so far on a drift up toward Wednesday’s high. The session features one rotation, said upward drift, which thus far has encompassed 14.75 points of range.

We are entering day 7 of the market on an upward auction, an auction which came into balance during days 3-6 and entered a sideways drift. Weekly Strategy Session readers, you may recall we were on watch to see if the big-range index volatility would persist of if instead we would tighten up and allow individual stocks to perform on their own merit. Thus far the week has shown signs of the latter.

With the right bit of chart massaging you can clearly see the balance formation we are currently trading within. This gives us parameters for a session that is likely to see 2-way, local-to-local type trading which favors scalping from the outside-in, like playing ping pong.

Up above the current balance are a few magnets; there is a naked VPOC at 4313.50 dating back to December 8^th then there’s a weak high just above that at 4315.50.

Alternatively, there is a bit of a thin zone below the current balance which comes into play if we trade below 4271.25.

Primary hypo is to see an open auction inside range which tests above the overnight high where we find responsive sellers who work to fill the overnight gap down to 4281.50. If buyers are not found here then we continue down and resolve Tuesday’s gap at 4279.50. I will be looking for signs of buyers here as well.

Hypo 2 is an early push higher which works higher to 4307.50, then 4313.50 then finally targets a break of the poor high at 4315.50.

Hypo 3 is a rejected move higher which sees a fast move lower down through 4271.25 and slides down to 4254.25.

These levels are highlighted on the following volume profile chart:

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Volumes have officially dried up in the Nasdaq exchange. The overnight session traded sub 8000 contracts ahead of the 8:30am Durable Goods and GPD stats. The Christmas holiday is fast approaching. Session range was compressed to the low end of normal as well, ranging just a few ticks below 1^st sigma and expanded a bit after 8:30am to become normal.

You really don’t want to force trades in this environment. It’s thin, primarily algorithmic participation.

Autopilot comes to mind.

However, if you are here, so am I and with the exact same intent.

Prices are high overnight after two primary up waves (9.25 and 12.5 points) pushed through the market. As we come into US trade prices are up in the upper quad of the globex range.

At 9:55am we have U of M Confidence numbers then at 10am we have Personal Consumption and New Home sales. The 10 o’clock hour also features the Richmond Fed Manufacturing Index.

Given the amount of economic news set for release at 10am, I am expecting a choppy, 2-way open.

Primary expectation is for us to chop about inside yesterday’s range before deciding on direction up to target Friday high 4304.50 then the MCHVN at 4307.50. There is also a naked VPOC up at 4313.50 which might attract prices. Then a weak high at 4315.50.

Hypo 2 is a drive higher to target the open gap up at 4333

Hypo 3 is an open rejection reversal where we attempt higher, find a strong responsive seller who rejects us back into yesterday’s value (4296-4290.75) and continues to test lower levels.

I have highlighted the levels I will be observing on the following chart:

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Nasdaq futures are flat-to-lower as we come into US trade. Volume and range are coming in a bit light for the globex session suggesting the holiday week might reduce participation a bit. As we come into the open the overnight low shows signs of being weak.

The economic calendar is not too busy this week. Today we have Existing Home Sales at 10am. The announcement shortly after the open may be reason to chop about early on before the market finds direction.

We are set to open right at Friday’s VPOC suggesting the market accepted these prices over the weekend. There was a bit of liquidation into Friday’s close, this can be seen as a large red candle on the volume profile chart.

The microcomposite we are trading inside has two distinct value areas with a thin pocket separating the two. If sellers manage to press below 4271.25 this pocket may come into play.

My primary expectation this morning is for an open auction inside of Friday’s range with sellers pushing down to test the MCHVN at 4277.50 then the LVN at 4271.25. I will be looking for responsive buyers around here who work toward the 4285.25.

Hypo 2 is buyers pushing off the open to go after the overnight high and test Friday’s high 4304.50 and target the MCHVN at 4307.50.

Hypo 3 is a drive lower below 4271.25 and push through the volume pocket to test its mid 4254.25 and if breached then continue through to the other end and target 4245.75.

I have highlighted these levels on the following volume profile chart:

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Nasdaq futures are trading higher. The volume and range are normal and as we approach US trade the market has given back over half of the overnight progress. Coming into today we had an expectation for a green close on the Nasdaq based upon a 30-year study of seasonality. This day has a high probability of closing in the green.

The problem when you are not the one who builds this type of study is you don’t get to dirty your hands with the data. How much is it up on average? What did the red days look like? What years were they? What were the conditions leading into them? Etc, etc.

The largest rotation of the overnight session came around midnight when a motivated buyer caused a 29.50 point unidirectional rotation.

The economic calendar is quiet on this option expiration Friday, however we do have some Fed officials speaking. At 10am Evans will be given opening remarks in Chicago, at 11am Kansas City Fed MFG activity, and at 12:30 Lacker speaks on the economy in North Carolina.

Taking to the chart and looking to the left, we are trading inside the profile from 12/11 which was the roll forward day for futures traders. If you did not convert to the March contract that day then you missed a key piece of context that sparked the entire move lower.

On 12/11 we 1-ticked the local swing high and sellers made an aggressive push lower. In their wake they left a thin LVN zone from 4270-4282.50 and this is likely to be an interesting area of trade during today’s session (baby blue box on chart). Yesterday we also left a thin-auctioned zone. It is the baby-pink box spanning from 4249 – 4259.

Primary expectation this morning is for sellers to work into the overnight inventory initially. Open auction in range breaks lower to close range gap then full gap. If no buyers show here then a run at the baby pink box to test the pocket mid 4254.25. If that breaks than sellers will target the VPOC at 4245.50.

Secondary hypo is buyers press through the thin pocket above to target the naked VPOC up at 4287.75. Then look for a run at overnight high 4299.25.

Hypo 3 is more of a drive down, aggressive selling on the open takes out the entire pink pocket, slides through the NVPOC and retest the MCVPOC at 4233. Look for signs of responsive buyers here who work back toward yesterday’s close 4266.

The levels discussed above are highlighted below on the volume profile chart:

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Nasdaq futures are up on 2^nd sigma range and volume suggesting we are seeing an abnormal globex session. The ranges the Nasdaq has printed this week have all been quite abnormal. Macro waves tend to cause this uptick in volatility and correlations, and we are certainly experiencing such an event as oil explores lower prices.

At 8:30am Initial and Continuing job claims came in better than expected and we saw a slight bounce on the news. This is a slight shift in character. Recently participants have been rewarding worse than expected job stats because an improving labor market is influential on Fed policy. Of course the monthly NFP report carries more weight than this morning’s data.

After the open we have Markit PMI stats at 9:45am and Philadelphia Fed at 10am. This may cause some choppy trade early in the session until participants hear the data. Or it may not.

Turning to the charts, you can see on the daily bar chart (right-side chart) how we are pricing inside of two volume pockets. These thin volume areas are prone to rapid price discovery. We initially found buyers at the first high volume node separating the two pockets, then we slid through and tested the bottom of the second pocket.

We came into solid structure Tuesday afternoon and I noted that we were likely to find support here. I do not say this to pat myself on the back, but instead to draw your attention to the fact that the market has memory and this isn’t just some random walk by prices. We also tested a prior zone of resistance. Piror resistance often converts into support and vice versa. The former is an attribute of a market trending up, which, long term, the Nasdaq is still trending higher.

Intermediate term we are seeing overlapping value. Balance. On the left-side chart I have noted the key price levels I will be observing today. There are several points of resistance up above current prices. They will be key in assessing whether we again V-shape higher or instead churn out a balance. Please see below:

Primary hypo is choppy open which squeezes higher to take out overnight high 4225 and test MCVPOC at4223 before finding some sellers and chopping.

Secondary hypo, given the large gap up, is to see sellers work into the overnight inventory. I will look for signs of buyers at 4190 then again at 4182.50. Otherwise look for a range gap fill to 4173 and potential full gap fill to 4160.25. This hypo might take on some driving characteristics (down) early in the session.

Third hypo is a gap-and go run higher. Given the large, ‘pro gap’, the markets are out of balance and the risk of a drive is elevated.

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Overnight volumes are elevated to the 2^nd sigma on the Nasdaq while the range has been contained and normal. Prices are higher on the globex session however the gap up has been a questionable show of strength for several sessions.

This week the price fluctuations of the Nasdaq have been highly correlated with oil. Oil volatility has become a key driver to investor sentiment and price action and likely will continue to do so until we see it come into balance.

Today is FOMC day. Earlier this morning we heard from the Bank of England and their commentary produced a modest bounce. During today’s trade, my expectation is for an hour or two of action followed by chop as the market waits to hear from The Fed.

Prices are currently trading in the range of October 30^th which, if you recall, was the session before Japan announced their massive stimulus package which led to a big gap up and a subsequent grind higher for several weeks. Now we have returned to the ‘scene of the crime’ to see if buyers are still motivated at these levels.

We slid through the second pocket yesterday and now we are coming into some solid structure. Given the velocity we have in our approach to this region, we may overshoot the CHVN at 4053.75. I have noted on my chart a few price levels just below that CHVN which are about 50 Nasdaq points away from current prices.

Early on my primary expectation is for sellers to push into the overnight inventory and work a gap fill down to 4084.50. This puts us near the lows to target 4081.50 (ONL ) then 4080.75 (YLow).

Secondary hypo is a sharp move back up the volume gap which takes out overnight high 4116.75 and builds acceptance in yesterday’s value region up near 4130. This puts us into a holding pattern until Fed.

Hypo 3 is a drive down, which is still in the cards given the current speed of the market.

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The macro waves we began to see last week continue to swell as we head into trade this morning. Late yesterday afternoon The Russians significantly hiked their interest rates. The Nasdaq shrugged the news off initially but around 6am, amid the Russian markets trading down significantly, sell flow rushed onto the tape.

The resulting globex auction carries the second highest volume dating back to July 2012 and a 2^nd sigma range. In short, statistically this was a highly abnormal session.

As we approach US trade, prices are trading higher and retesting Monday’s low print at 4141. I suspect this level will be of interest in early morning trade, especially as it also nearly marks the globex session midpoint.

The market is heading lower. It is doing so in a process we call discovery in auction theory. The market will continue to head lower until it finds buyers. You can now simplify your job down to answering one question—is the market done finding buyers?

Answering that question is a matter of observing characteristics of a quality swing low and making an educated guess. There are no guarantees in trading.

Taking to the charts, yesterday appears to be a continuation of Friday’s selling where we trading out the week on the lows. Once it breached the very low volume node near the middle of the breached volume pocket, our expectation was for price to continue to the high volume node on the other end. This is basic pocket play.

The responsive buyers were active at this level (about 4144.75) and produced a decent looking low. I initiated a weekly call option in NFLX right around this level and it immediately caught a strong bid as well.

However, the session moved forward, and the buyers were unable to defend their bounce and instead gave back nearly all of it by the close. This was a clue. If the market had truly found a buyer here then we likely should not be back down near the lows. I cut NFLX for this reason, as it too was hovering near my entry.

Overnight price breached the next very low volume pocket. Whether sell flow pushes prices below 4115 during RTH will be my clue regarding lower prices. Swing high/low are often not established during globex, thus sellers have the edge.

My primary expectation is for and open auction outside of range where prices to attempt higher early on. Whether buyers can reclaim Monday’s range (4141) and the overnight mid (4143.50) will be important. If they can, we might see a test of the overnight high 4176.50. Otherwise we continue trading lower to test the pocket mid at 4115 and if that breaches then my expectation is for trade to continue down though the pocket.

The HVN on the bottom of this pocket is not as peaked as the one we experienced yesterday, thus trade could become a bit muddy in this region. 4053.75 is the ultimate target on the pocket fill but we may see responsive buyers before then.

Hypo two, with an elevated expectancy, is and opening drive down. This would take out the 4115 pocket mid early and work down to the 4053.75 target quickly. In this case we may blow through the level before finding a responsive bid.

Third hypo is buyers sustain Monday’s range, take out the overnight high (4176.50) and make a run for 4200.

You can see these observations and levels indicated below:

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Nasdaq futures are higher to start the week after a weak close on Friday. The market found a bid at an interesting level, 4180.25, just a few ticks above the midpoint/LVN of the volume pocket we entered during Friday’s close. The range is just beyond 1^st sigma suggesting an elevated risk environment and volume is running high 1^st sigma as well.

Just before the open the Industrial/Manufacturing Production data is coming out and shortly after the open at 10am the NAHB Hosing Market Index. More housing data is due out later in the week but the highest impact news comes Wednesday when both the Bank of England and the US Federal Reserve will be releasing minutes, employment, economic projections, and rate decisions.

Last Friday, after printing an abnormally wide initial balance (52.5 points) during the first hour of trade, prices spent most of the session churning inside the wide range. Then, in the final hour and fifteen minutes the market sold off sharply. The move carried into last night’s globex for a short bit before reversing higher.

Prices of crude oil are still drawing the attention of macro players and a rally overnight in the commodity is being at least partially attributed to the strength in equity indices.

Early on I am looking for sellers to press into the overnight inventory. Whether those sellers are able to take prices below 4200 will be telling early on. Initially I will be looking for signs of buyers at these levels who work higher toward overnight high 4227 and ultimately target Friday’s VPOC at 4231.

Secondary hypothesis is for sellers to accelerate below 4200 and target overnight low 4180.25 which opens us to the idea of continuing to explore lower prices especially below 4179.

Third hypo is a strong buying move to test the weak high up at 4251.25.

I have highlighted the levels mentioned on the following volume profile chart:

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Knowing when to roll forward into the next quarter’s future contract is a vital piece to trading. Yesterday was no exception. If you were observing the December Nasdaq contract than you did not see the failed auction that occurred at noon ET. We traded two-ticks above Wednesday’s high and immediately failed back lower followed by a big swoosh down.

These little contextual pieces are the details that add up when you are trading.

Moving into today we have futures trading lower. The Nasdaq after hours continued lower for most of the session. On a day-by-day seasonality study of the last 30 years, today has the second lowest odds of being a positive gain session. Ranging 44.25 points, the session is normal statistically, with the 1^st sigma range of a down day being about 46 points. Volume is a bit higher than first sigma as it appears most participants have now migrated to the March contract.

Yesterday had many characteristics of a trend day early on but we saw that negated. That force of supply is likely to carry into today’s session. At 9:55am U of M will be releasing their survey and we have an otherwise quiet economic docket.

I am still sorting some issues out on my charting, but my primary expectation is for price to trade lower to test the overnight low 4189.25 before finding responsive buyers and balanced, two-way trade ensues.

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