Examining Overhead Supply
The index markets continued lower overnight, extending the move made yesterday afternoon. The question now is whether the news driven selling from yesterday has created more overhead supply then can be handled. This would result in value migrating lower and washing out last week’s progress.
Should a short-covering type rally occur today, I would expect it to run up to about 3394 on the NASDAQ futures. If the action is able to sustain trade above 3394, the expectation is for buyers to target 3405 where I suspect we will see the effects of overhead supply from the Friday-to-Monday action.
Price is slippery below due to the thin profile structure we are working inside of. It would not surprise me to see trade back down to last Wednesday morning’s trade, before the surge in prices. Should this occur, I will be using the low volume node at 3360 as support to lean on. Should we see price accepted below this level it would suggest a major sentiment shift away from all of last week’s action.
Our early clue to whether bulls can reassert intermediate term trend force will be the overnight low volume node at 3383.75. Sellers hold the short term and overnight trend control. Stay tuned to the midday report for insight into day control.
I have highlighted these levels, as well as a few scenarios on the following market profile charts:
Late Afternoon Update – The Shelf
Keeping The Balance
Overnight was fairly quiet in the Composite futures where the main feature was a rotation higher in the early hours, around 4 am. The pulse higher was effective in erasing a slow and balanced drift lower, but it also put the market into overbought territory on the very short term. Early on, perhaps even premarket, my expectation is for sellers to work price lower a bit before we see an attempt at another rotation higher.
I have envisioned two scenarios for today, both which expect value to be built upon our existing and fragmented profile structure. Should we press beyond these envisioned profiles and accept price beyond their range that would be an early cue this week that sentiment has shifted.
You can see my vision along with levels to monitor on the following market profile charts:Comments »
Exploring Temporary Phenomena
Yesterday’s profile was interesting to watch develop because if one had not clearly identified the opening drive-type action from the buyers, they may have hypothesized the action was only a temporary phenomenon known as a short squeeze. Value was slowly migrating lower all week and we came into the morning with a sharp gap lower which suggested something overnight had changed the market’s dynamic. When the second leg higher erupted at high noon, it signaled a fresh batch of initiating buyers had stepped in and put fresh money to work.
In short, a squeeze may have been the spark, but an authentic accumulation occurred throughout the rest of the day.
Trend days are considered risk-free entry point in Market Profile theory which suggests that buying any time during a trend day will allow you to exit at higher prices, eventually. The “eventually” is one of the greatest qualities of market profile I have come to learn. They are not a very effective timing tool. Instead, they are fantastic for framing a day, estimating range, and locating key event points in the tape. Timing is best achieved with the bar charts.
I’m going to keep our attention on the /NQ because I am actively trading it and most of my stocks are nestled in its electronic bosoms.
Weakness crept into the overnight session, whether it was profit taking or short sellers is not material, it was sell flow. The action was able to recapture the upper quadrant of the second leg higher in the index, which is the area I envision us spending our day. Best case scenario for the longs is a consolidation along the upper quadrant of the trend distribution.
Should the selling pick up and press us below 3382.75, this would suggest a significant sentiment shift, and would merit caution before initiating any new long exposure.
I have highlighted this level, as well as drawn out a few scenarios on the following market profile charts:Comments »
Turning Our Attention To The Head
Two big rotations lower overnight have taken prices much lower in both the NASDAQ composite and the S&P futures. Today’s market profile analysis will focus on the /NQ, the electronic mini futures contract which tracks the NASDAQ composite.
The reason for turning focus away from the S&P is because I perceive the current structure of the NASDAQ important here.
First, observe the following bar chart, dating back to 10/16, we are close to printing a head and shoulders topping pattern. Price is in the top window pane:
Trade has been bracketed since opening Sunday evening and we should monitor the bracket extremes to determine if the market is coming out of balance. Much like the behavior at the edge of a low volume cave, price can penetrate a bracket extreme without breaking the level.
Looking at the overnight action, we can clearly see sellers establishing control overnight which has pressed us out of yesterday’s value area and range. This tells us something overnight changed the perception of the market. The risk today is elevated, as is the reward on an intraday basis.
It will be important to monitor the open type. Early on my expectation is for buyers to react to these lower prices. However, we are in “pro gap” territory currently, with price on the S&P trading 10 handles away from yesterday’s close. This makes filling the gap a more challenging endeavor, one where someone certainly should not just buy the opening print and wait for the gap to fill.
I have highlighted the support levels I will be keying off of today in the NASDAQ as well as a envisioned a few scenarios on the following market profile charts:Comments »
What The Overnight Sellers Need To Accomplish
Buyers could not hold on to their afternoon progress overnight when sell flow came in and effectively erased the gains. The market began to stabilize early this morning but looks vulnerable to another rotation lower.
We are in the process of establishing value on the indices as we work though earnings season and this week’s Twitter IPO. They busy calendar has done little to the prices on the Nasdaq and S&P index thus far, but that is likely to change as the week presses on.
With that in mind, I like to define the edges of the field or price levels which would tell me we are transitioning out of value and into vertical discovery. I have highlighted these levels below on the following S&P RTH Market Profile Chart. I used the Nasdaq 24-hour chart to envision a few scenarios on the day because the S&P 24-hour chart is very fragmented:Comments »