Yesterday morning we tested higher early in the session and found responsive selling early.  The action followed through for much of the day until we reached the value area high from Wednesday’s initial distribution.  If you recall, Wednesday traded like two different sessions, thus it made sense to split the distributions in market profile.  The resulting market profile print from yesterday is a normal variation which ended near the middle but lower than Wednesday’s close.

The USA economic calendar is quiet on this Quad Witching Friday, however Canada is releasing the CPI information at 8:30am and we also have Euro-Zone Consumer Confidence at 10am.

The overnight profile is squatted with no clear balance forming.  We however form a shelf at 3784.75, only one tick above the slippery pocket spanning from 3784.50 – 3780 on the intermediate timeframe.  This small pocket is critical in the short term because it separates price from the uppermost auction distribution and the below balance region.  Even more important, sustaining the prices shows the market accepts the Fed rally.  Otherwise, if we drop back down into the balance just below, the entire context is called into question, and the toothy thin zone below our most recent balance becomes a tasty target for short sellers.  I have highlighted this intermediate term structure below:

With that intermediate term context in mind, let’s put our eyes on the short term and find out where we can best gauge price action intraday.  These levels are a bit more subtle to spot today by simply looking at the distributed profile, but when I split it open and observe some of the key characteristics of yesterday’s trade, the relevant levels jump right out.  Use these levels early on today as your sign posts:

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The Nasdaq futures are trading a touch higher overnight in a session which printed a quiet, slightly imbalanced market profile.  Initial Jobless Claims and Continuing Claims came in worse than expected at 8:30am but we saw no reaction from the market after the news.  We have Philadelphia Fed at 10 am, and the Natural Gas report at 10:30am which may affect any energy trades.

Yesterday reads like two different sessions on the market profile.  There was the normal variation session before FOMC, and the trend day after the session.  Our expectation after a trend day is that we are likely to see balance near the upper end of the trend

Taking our eyes out to the long term, I want to point out two items.  First, we are trading near prior swing highs.  We are coming into prior swing highs with strong buyer thrust.  How we handle these prices will be very telling going into summer.  On the second chart, I have plotted monthly profiles to exhibit the lack of structure behind our most recent upward move.  This is a caveat to the recent upward action, something I keep in the back of my mind but always consider.  See below

Finally, and perhaps the most pertinent to swing trades (2-12 days) is the intermediate term auction.  Prices are back inside the uppermost distribution of action.  Buyers need to sustain trade above 3784.50 to keep us from a harsh revisit of our prior balance.  Sustaining trade above this level would be constructive and suggest the strong initiative force which drove us from this balance on 06/12 has changed, as has sentiment.  See below:

 

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The Nasdaq futures are quiet overnight, up a few points as the financial participants hold their collective breath ahead of this afternoon’s Fed proceedings.  The market expects $15B pace in MBS purchases, $20B pace in Treasury purchases, $35B in QE.  We also our rate decision (0.25% forecast) and Janet Yellen press conference at 2:30.

With OPEX this Friday, and the Fed itinerary, the rest of this week is not an environment to be complacent in.  There is likely to be other timeframe participants through the rest of the week, and knowing the key price levels and observing the market behavior is important for knowing exactly the type of context we are trading in.

On the intermediate timeframe, we are balanced just below our uppermost distribution.  Three attempts have been made to breach the threshold separating our current bracketed trade from the uppermost distribution and each time we have found responsive selling at the resistance.  Below, and nearly 40 Nasdaq points away, is a base which formed during the end of May and into June before we rallied.  The VPOC of this entire composite still resides in this bottommost distribution and the structure below is thin and toothy.  If sellers can initiate order flow below 3754.75, then we are likely to see a test of this base before we go elsewhere in the auction.  See below:

If you look at the 24-hour globex profiles, you can see the long duration of time we have spent in balance.  The older these balances become, the more likely it is they break.  The key is monitoring the action near the extremes of value and whether we are making a clean break.  See below:

Taking our attention to the short term, we can see value continues to overlap but move higher over the last four distributions.  Yesterday’s auction formed a much cleaner distribution than Monday, thus we should monitor today’s action verses the value area that formed.  A clean move away from this value may be an early indication of where the market is headed over the coming days.  See below:

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Nasdaq futures sold off 10 points just after the 8:30am release of stronger than expected Consumer Price Index numbers.  The futures had initially drifted higher overnight to take out yesterday’s high and the action made sense when you view our price action in yesterday’s regular trading hours.  There is not much else on today’s economic agenda.  We have headline sensitivity to issues surrounding Iraq, the World Cup is in full swing after the USA narrowly escaped with a victory over Ghana, and we have FOMC announcements up tomorrow.

Yesterday we printed a Normal Variation Day which structurally has a wide initial balance followed by a range extension from the initial balance.  It is as if the other timeframe participant has watched the early action of the auction and decided with conviction to make an aggressive entrance into the market.  Yesterday, we traded higher for the first hour of trade until responsive sellers made an aggressive entrance into the market which subsequently extended our range lower.

The quirk of yesterday’s Normal Variation print is these types of profiles usually establish value lower.  That was not the case however yesterday, as the remainder of the day behaved more like a neutral day, where we saw the selling move faded back to the midpoint of the session.  After that occurred, the market returned to a one timeframe, local-to-local chop.  Logically, we drifted higher overnight, pressing into the other timeframe seller (OTF) from yesterday.

If we take a look at the intermediate term, we can see the overhead supply which we bumped into, which makes the responsive selling make much more sense.  We traded into our uppermost balance region and finding sellers up there was a very logical expectation.  As the market continues trading in balance, we may test lower to see if buyers in the lower balance/base possess the same conviction they had prior to lifting prices.  Overall, we are in balance with well defined regions to trade/form intermediate term bias from, see below:

Bringing our eyes in a bit closer, we can see there was no clear value area yesterday during trade.  It almost suggests imbalance.  And although we saw the aggressive entrance from an OTF seller, we expect their behavior to press balance lower.  The net effect of yesterday’s action was higher prices and a higher VPOC, although the lack of value suggests an imbalance exists on the short term.  If the sellers do not take control early on, we could set up a squeeze.

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Nasdaq futures opened to a sharp drive lower Sunday evening before finding a bid slightly below our Friday lows.  The market then drifted a bit higher for the rest of the session and we are currently priced about 10 handles below Friday close.  We have the Empire State Manufacturing Survey at 8:30 which could change prices ahead of the bell.  We also have Industrial Production at 9:15 and the Housing Market Index at 10.  Overall, the early news flow may create some early opportunities in the market.

Starting with a long term view of the Nasdaq Composite, we can see the market finding sellers after three weeks of exploring outside a well-established bracket.  The selling came in right where we might expect, up near prior swing highs.  The question this week is whether sellers become more active and begin initiating additional sales after their responsive actions.  Below is a chart where each candle represents a week of prices on the Nasdaq Composite:

On the intermediate term, we can see prices are in a state of balance.  We are trading between two well-established value zones.  The levels we currently inhabit received very little auctioning the first time around as we simply blasted through them.  The thin zone can produce fast moves in the short term, but the resolution to this intermediate-term balance will depend on who can initiate trade beyond the strong balance zones on either side of this volume pocket.  I did not want to mark too many low volume nodes to obstruct the view of the market here, but I did mark the most pertinent ones for monitoring a transition away from this zone.  Three levels are noted below—two low volume nodes near the extremes and on low volume node near the middle (pivot).  See below:

I have noted my key observations of the short term auction below:

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Nasdaq futures are trading flat overnight on a balanced session of trade.  A bit of selling came in on the PPI data at 8:30am and was soon met with responsive buying.  The net of the actions is prices trading near unchanged as we approach cash open.  We have Consumer Sentiment coming out of University of Michigan at 9:55am but an otherwise quiet economic calendar on this Friday.

Sellers grabbed the reigns yesterday and pressed the short term auction out of balance and into their control.  They were able to drive down through the thin volume structure below our upper balance before ultimately finding some responsive buying at the value area high of 06/05 trade.  To be more granular, the responsive buyers were found just below where prices initially launched from late on the morning of 06/05.  The event was a catalyst of change, which is why I had to split the 06/05 market profile in half to present a clear picture.  I have highlighted this event below, and how we found responsive buyers again at this level:

The intermediate term picture shows we are now trading out of balance and inside a thin volume zone.  Price is likely to move faster in this zone and that presents greater opportunity for intraday trades.  We have a sharp overhang of supply above, and whether buyers can push back into the supply will be a big clue going forward.  My expectation is to find responsive selling on our next probe above 3783.50, however anything is possible given the overarching uptrend on the long term.  I have highlighted this supply overhang below:

 

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Volume was very low overnight on the index future instruments, particularly the Nasdaq.  This is likely a product of two pieces of context—we are in a tight short term balance and this morning active traders roll forward to the September contract.  I used to wait for more volume to occur in next quarter’s contract before moving on from the front month, but this often led to more intraday confusion then one should really manage.

There were economic numbers out of France overnight and a growing tension in the Mideast as Iraq is degrading into a troubling situation.  The USA just released Retail Sales as well as Initial Jobless Claims.  Both numbers appear weaker than expected and our initial market reaction has been a bit of selling.  The rest of the day has little on the docket—we have business inventories at 10am, a Natural Gas Report at 10:30, and at 30 year bond auction at 1pm.  The Fed is set to release their Balance Sheet after hours today.

The intermediate term is in balance.  This balance is occurring at elevated prices.  When you take the perspective of a weekly chart of the composite index itself (not the front month future contract) you see buyers are sustaining this intermediate term balance near annual highs and just below the manic phase of the dot com bubble:

The intermediate term balance stretches four sessions, and this being the Thursday before OPEX and also roll forward for futures traders, we may see resolution very soon.  I have highlighted this intermediate term balance, as well as key levels in-and-around it to keep in mind as we move forward:

Seen from a slightly different perspective, below I have built a profile of the last four trading days using the 24-hour trade of globex.  As you can see, a bit of back-and-fill could take place to further build the structure of this balance.  The move from this well established balance is likely to be a quality one:

Turning our attention to regular trading hours market profile, we can see the Nasdaq coiled tight like a spring.  We have printed the following series of profiles: Neutral-Inside-Neutral.  The market has been local-to-local mostly, with OTF waiting near the extremes of the price action.  We have key levels below to explore, however yesterday’s auction cleared up the poor highs that were in place from the prior sessions and shows a nice, clean taper at the highs.  This suggests a sturdy high, however up may still be the path of less resistance because value continues migrating higher.  I will be keen on the next big value shift, but for now I have highlighted the short term, balanced context below:

 

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Sellers went to work early this morning in the Nasdaq futures.  Their initiative appears to be derived from several economic data points released in the UK.  Their overall employment change was a positive beat while average earnings were worse than expected.  We are seeing some responsive buying come in just below the gap we left open last Friday morning.  There is not much news flow expected from the USA today.  There is a petroleum status report at 10:30am which may affect the energy traders.

We have been observing a poor low on the 06/06 market profile for a few days.  This poor low is likely to be settled during today’s session.  We already exceeded the 3781.25 handle during globex, but we are currently trading just above it as we approach cash open.  Taking out the poor low creates an opportunity to target a gap trade down to 3776.50 and if we are down there the naked VPOC at 3775 would be a tasty target for the short sellers.  I have highlighted these levels below on the market profile:

It is important to remember that order flow ultimately dictates the direction of price in the short term, thus we may reveal a large buyer on the open.  In that case we might want to shift our focus to the overnight gap and the poor highs above.  Keeping an open mind and having a few plans (scenarios) in mind is key to trading the intraday action in futures well.

Zooming out a bit to the intermediate term, we can see three sessions of balance and we are about to open on the low end of it.  Markets spend more time in balance then they do in vertical exploration.  However, early in the year we saw aggressive selling which vanquished intermediate term balance theory.  This is something to keep in mind.  However, we have logical price levels to observe.  If we trade down into last Thursday’s prices, then we should be keen on the composite low volume node at 3773.75 and more importantly raise our guard if trade is sustained below 3769.75.  Price might start moving fast if we trade below that level as the structure is very thin.  I have highlighted these levels with price levels, however the volume profile pictured only encompasses the three days of balance:

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Nasdaq futures drifted lower overnight and prices are currently trading just below yesterday’s value area low yet inside prior day range.  There is not much economic news scheduled for our regular trading hours, but we do have JOLTs Job Openings at 10am.

Price on the intermediate term came into balance with Friday’s session, and the key now is to examine whether prices sustain balance on the intermediate timeframe, continue a 1-timeframe higher path, or instead start a new swing down.  I have noted my key composite levels, but the actual volume profile pictured only encompasses the intermediate term balance of the last two sessions:

Yesterday may have felt weak in the market, especially if you tuned in during the mid afternoon when we traded below initial balance.  However, prices traded higher long enough for volume to migrate a touch higher verse Friday.  The sellers will need to press a bit harder to gain control of the short term auction, or even to put us into balance.  For now, the short term is buyer controlled with a likelihood of prices coming into balance.  Keep in mind, anything is possible:

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The overnight trading session in the Nasdaq was quiet, trading less than an eight point range throughout the globex session.  During the session the major news flow came from the east where Japan released several economic stats including their GDP and most of the economic data points were positive.  The docket for the USA session is fairly open—we have Fed speak from Bullard at 9:10am, a few short term treasury auctions at 11:30am, and then two more random Fed members speaking at 12:45pm and 1:30pm.

Starting at a high level, we can see the composite index is buyer controlled.  Last week was their second week of controlling the tape and the progress was sufficient to press through the low end of prior swing high balance.  I present this long term picture zoomed out to show our proximity to the great dot com bubble, thus you may have to enlarge the picture and squint slightly to see how we have pierced swing-high balance.

At the same time, we should be on guard for a lower high, and the subsequent reaction that could materialize from such an event.

The intermediate term is buyer controlled and perhaps a bit extended.  We never quite know how far a swing will go in any direction, but we can say without question this current swing is 3 days old and built upon a layer of balance built upon 8 days of swinging higher.  The net is 13 days of upward-to-consolidating-to-upward prices.  I have highlighted these transitions and some key levels below:

The short term auction is buyer controlled.  I have colored the background on my regular trading hours market profile chart baby turquoise to discern it from globex.  We printed a higher distribution overnight even though prices are currently a touch lower than where we closed on Friday.  This mainly suggests the prices were accepted overnight.  There are several untested levels below on prior day profiles, but whether sellers have the conviction to test them will first start with recapturing yesterday’s value, which we are currently trading just on top of.  I have highlighted this price level as well as others on the following market profile chart:

 

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