Nasdaq futures are currently priced to gap lower about 10 points after a wave of selling took out Tuesday’s opening swing low at 3606.50 around 6am.  The selling accelerated at 8:30 when the PPI numbers were released.  As price currently stands, we are set to open out of value and out of range suggesting the short term is out of balance and the risk environment is high.

Risk of an opening drive is elevated today, especially given the big gap left open from Monday’s open.  The stakes are high because not only are we inside of option expiration week, but we also have prices on the Nasdaq which are attempting to escape intermediate term balance.  Paramount to achieving this is printing a higher low on the intermediate term.  I have roughly chosen 3595 as the price where I want to see signs of responsive buying.  If they do not show up, we could be in for a fast liquidation trade because mean revision will set in and the short term profile structure below us is thin.  Here is a picture of the intermediate term balance with relevant price levels noted:

In the short term auction, yesterday was a neutral print with range extension on both sides of the profile.  These prints tend to occur at or near inflection points.  The profile shows responsive selling coming in soon after we range extended higher and taking out the lows.  The rest of the action was spent printing volume in the bottom half of the profile which made for a saggy look.  My expectation was for price to balance out this profile by trading down to 3595.  I did not however expect to be waking up to these prices.  Buyers continued migrating value higher yesterday which tells me the short term auction was still buyer controlled as of yesterday’s close.  I have annotated the market profile below:

Scenario 1: market tests lower, finds responsive buying between 3595 – 3593.75 and begins rotating back to VAL 3606.50

Scenario 2: market tests lower, takes out 3593.75 and accelerates lower- opening drive down

Scenario 3: market tests higher finds responsive selling at 3606.50, balances out above Monday VPOC 3597.50 and then goes for overnight gap fill to 3608.75 then VAH 3614.75

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It seems as if each time we see a few progressive up days in the Nasdaq we soon see a session of heavy selling which unwinds all the progress made.  This behavior has conditioned astute swing trades to fade the rips.  The question now is whether we see more of the same or instead the market begins climbing a wall of worry.  You can see a few recent examples of what I am referring to on the following daily Composite chart:

With the long term in balance and a bit of skepticism about joining strength, we have to question intermediate term balance.  I have expanded my intermediate term profile to encompass 26 sessions of trade because price was escaping the shorter 18 session balance.    As you can see below, we are trading up into the thin upper tail of our balance.  This zone is where action can become rather interesting as the pull of mean revision is strong but with enough propulsion (buy flow) we can escape balance and swing higher.  We left a big gap in the chart yesterday which suggests strong buying but also leaves a sloppy chart behind.  I have marked the key levels below which buyers need to defend to keep us on a swing higher ascent:

The short term is buyer controlled.  Although the larger timeframes show balance, on the short term we are out of balance and exploring higher.  Price action and volume were dynamic enough yesterday to press our entire value area above the prior (Friday’s) day’s session.  One cannot predict whether such upward progress will continue, however we can monitor the continuation via some key price levels.  Between the price levels highlighted above, and the ones below, we can determine if buyers are coming in today and initiating into strength by defending these key levels:

 

 

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The Nasdaq is about to gap up into the week.  Conditions are consolidating and bracketed on the intermediate timeframe and a break away from this zone will require some volume and conviction.  We can see two high volume nodes on the balance with price trading between the two and plenty of unresolved levels inside the toothy profile.  How this resolves will be very telling, although the long term suggests the sellers have a slight edge.  Below you can see the key levels within the intermediate term balance, as well as the bracket extremes:

The short term shows the formation of balance Friday, however we are set to open outside of balance, outside of range which suggests we are opening out of balance.  In this environment the risk of an opening drive in either direction is high.  The gap below should be respected and signs of weakness may suggest the gap fill trade will take hold.  This is even more likely given the fat, high quality distribution below, which we are likely to revisit. See below:

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As I continue to study the opening swings and the behavior that occurs in-and-around the levels what becomes clear is how important the narrative of the tape is to successfully positioning yourself intraday.  The early action in the market is very telling of how the morning is likely to progress.  Also, how we go into New York lunch hour and how we leave the lunch hour are vital to trading the afternoon well.

The key is objectivity in your analysis and that comes from keeping a clear and calm mind. Shifting my swing portfolio to less hands on positions like ETFs and dividend stocks is also key, because even on a quiet day of chop in the Nasdaq, having a position down 12% is a distraction.

There were some very interesting opening swings and tight congestion points this week.  The daily action makes sense given our intermediate term balance.  Below you will see a picture of the intermediate term balance followed by annotated daily auctions.  Enjoy!

INTERMEDIATE TERM BALANCE:

MONDAY:

TUESDAY:

WEDNESDAY:

THURSDAY:

FRIDAY:

 

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The market has been kind enough to reward even the most simple of short trades, like shorting Twitter into lockup expiration.  With this in mind, we should respect the head-and-shoulders pattern forming on the NASDAQ composite over the duration of 2014.  First thing first, sellers need to gain control of the intermediate term.  Right now we are in balance.  See below:

Here is the same volume profile (15 sessions) without bars overlaid.  I have highlighted the key price levels inside our current balance:

The short term auction is seller controlled.  We can see value migrate down after 4-6 days of overlapping.  The sellers struck first.  Yesterday however suggests the action may have been temporary.  Early in the day the profile resembled a lowercase letter-b.  This is long liquidation.  However, the sellers did not demonstrate their usual follow through.  Instead responsive buyers came in and auctioned price up for the rest of the day.

Key today is whether buyers continue responding to these lower prices, or whether sellers begin initiating more selling into the weakness.  I have highlighted these observations, a few scenarios, and important levels on the following market profile charts:

 

 

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The sellers sat back and waited for higher prices this week. Once they had prices they deemed unfair to the upside, they came into the market in droves. Thursday and Friday successfully unwind steady bull progress. However, there is still potential for buyers to turn the market around according to my intermediate timeframe analysis. For now, here are the weekly opening swings and also a week of market profiles. Enjoy:

MONDAY:

TUESDAY:

WEDNESDAY:

THURSDAY:

FRIDAY:

THIS WEEK IN MARKET PROFILE:

 

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Nasdaq futures are lower overnight, currently trade is down nearly 20 handles off Thursday’s close.  Selling activity picked up early this morning around 6:30am.  We are currently trading right around yesterday’s value area low meaning we are set to open inside range, potentially inside balance which suggests the market is coming into balance.

The weekly candle will give us a ton of information this afternoon as we get to see whether price will struggle at the midpoint of my proposed bracket range or if we have enough power to continue higher and set the other extreme.

The intermediate term auction is buyer controlled and working on continuing higher after printing a higher low yesterday.  I have highlighted the intermediate term on the following volume profile composite:

The short term auction is a rare spectacle of balance.  We printed a neutral print with price never exceeding the initial balance.  This happens less than 3% of the time over the last 3 years of data.  It shows indecision on the part of buyers and sellers.  We can see a volume skew to the upside plus a close near the value area high which suggested just a slight bit of buyer conviction.  However, the next accepted move away from here will be the important one.  For now, the short term is in balance:

 

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Nasdaq futures are quite a bit higher overnight, far outpacing the performance of all other major indices.  As of this writing, we are set to open about 50-to-60 points higher on the /NQ_F futures.  Pre market we had Durable Goods Orders and Jobless Claims which brought more buyers in, however most of the overnight strength is being attributed to earnings.

We are now above the midpoint of my proposed bracket range on the NASDAQ meaning the risk of being long is greater than being short.  At the same time, our intermediate auction continues higher.

These big overnight gaps can often create a frustrating day trade environment.  Risk is elevated because the market is clearly out of balance.  Often it is best to do very little, instead managing existing positions and carefully looking for rotation opportunities into stocks that have not run.

I highlight my primary upside target for the Nasdaq on the following intermediate term volume composite:

I am using a 24-hour market profile this morning since we had so much overnight action.  I want to see the footprint this action left and look for high opportunity levels as well as envision how today’s profile may take shape.  I have highlighted these observations below:

 

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Nasdaq futures traded mostly flat and balanced overnight until some early morning selling pushed us a touch lower.  As a result, the overnight profile shows two distinct volume distributions.  We have Flash PMI data at 9:45 and New Home Sales at 10:00 as well as some major Dow components reporting earnings before the bell.  Perhaps the most sensitive announcements pertaining to the Nasdaq come out after market close today, including earnings from Apple and Facebook.

What I attempt to do with a long term chart is speed read the context of the market long term and use the information for broad strokes of risk analysis.  Essentially, my vision is for the long term auction to come into balanced, bracketed trade.  This is something that has not really happened since mid 2012.  We are roughly above the middle or mean of this bracket, which makes risk of holding longs greater.  This still is occurring inside a very long term uptrend so I give the upside a slight benefit of the doubt:

On the intermediate term, my goal is to determine who is in control and when we may see a new intermediate term change.  Right now the buyers are in control of the intermediate term.  They are pressing prices higher since tax day.  We have come close to exceeding the prior swing high and the possibility exists that buyers can remain in control, further driving prices higher.  However, I took the stance yesterday that we may be nearing another inflection point and I made a few adjustments to my portfolio.  Yet buyers remain in control of the intermediate term swing, see below:

We use the short term auctions to gauge the continuation of the auction, always looking for signs of aging like overlapping value or opposing wicks (responsive selling) or sloppy distributions of volume within the profiles.  Yesterday exhibited strong buyer control but also displayed a few interesting signs.  We formed a P-shaped profile which suggests a short squeeze erupted early on but new, initiative buyers were not strong enough to continue pressing the value higher.  In context, their passiveness in the afternoon makes sense; we made a ton of progress via a gap higher and a strong morning drive.  Buying at this point became difficult.  Yet, we did see some buyers dipping their toes in as another rotation did develop late in the day.  Overall, buyers still in control also by closing out the day near the highs.  This auction is likely to continue higher in the short term, especially if yesterday’s value area low holds as support.  Otherwise, the gap fill trade may kick in.  See below:

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The Nasdaq composite is up slightly overnight on a balanced session of trade. One of the economic releases I will be watching today is the 10am Existing Home Sales and whether it stimulates trade in my shares of Zillow.  There are no other major economic reports out today, but we do have a slew of earnings on tap in the coming days which may materially affect the manner in which the NASDAQ trades.

The long term auction is in the process of balancing via a bracketed trade.  My goal in these conditions is to locate bracket extremes as well as the midpoint and base my risk around these parameters.  Currently I estimate we are below the midpoint but far enough away from bracket lows to justify reducing risk a bit.  As this balance progresses, the parameters will become more clear.  This process is more art than science.

The intermediate term swing trade is buyer controlled.  I decided to change my interpretation of the intermediate term timeframe recently.  The intermediate timeframe is not something I measure in time, but rather by the swing trade occurring.  Buyers control the current swing but are tasked with either printing a higher low, a higher high, or both.  Thus even through the control the current swing, their control is still in question.  See below:

The short term auction is buyer controlled.  We are seeing their force abate slightly as value begins to overlap.  However buyer participants came into Monday seeking lower prices and when they saw a perceived discount they snapped it up.  Look at the strong responsive buying tail we printed yesterday as well as the follow though initiating buyers who closed us near the high of the session.  This is a solid example of a buyer controlled market profile:

 

 

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