Something to keep in mind whenever using a tool or indicator or data set to observe market behavior is the risk of confirmation bias. As objective as numbers and graphical representations of numbers are at first impression, as we shape them and select pieces from them we form our own data.  The key is perception and whether it is guided by the logical mind or the more instinctive, yet emotional mind.

One of the essential tasks for any trader is knowing when conditions have changed as early as possible.  Some strategies fare better in certain conditions, like balance.  Other strategies would be better suited for the price discovery phase.  If these concepts are a bit over your head, then I suggest taking a few hours to bring yourself up to speed with market profile. This however is not mandatory to interact with today’s post.

Below I present the same chart in every way except one—the first chart shows our developing balance as I have presented it for the last several sessions, with 08/22 being the point of change where our current balance initiated.  The second chart instead uses 08/25, the following session.  What I need your help with, traders, is determining when the CHANGE event occurred.

The implications are important for a few reasons.  I will discuss these in detail if I have at least five votes.  Observe the two charts below and simply leave a comment whether your think chart 1 (08/22) or chart 2 (08/25) marks the moment when a change occurred which led us into our current balance.  If you feel like it, add a few notes about why you answered the way you did.  See below:

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Nasdaq futures are flat overnight after printing a very wide and fast range yesterday.  The spike in volatility yesterday coincided with the Apple product release.  As the event introduced new technologies, the price of AAPL stock was radically swinging, moving the Nasdaq alongside it.  The economic calendar is quiet for today’s session, however there are a few pieces of context to keep in mind.

First, tomorrow is the Thursday before OPEX, a day often reserved for shenanigans.  Second, China released their CPI and PPI data after hours tonight which might impact any Chinese holdings currently housed in your book.

Turning our attention to the auction, we can see the intermediate term still hangs in balance.  The fast action was enough to raise a few eyebrows, especially how we rejected fresh swing highs, but we do remain in balance overall on this timeframe.  This balance is best seen using a volume profile which encompasses the last 13 sessions.  I have built this profile and noted the key price levels below:

Yesterday I made several comments about 4080.  The reason was how price was behaving at this level.  Sellers made three aggressive pushes at 4080 which were absorbed by a buyer, presumably the same responsive buyer who existed on Monday in this territory.  The problem was, like any aggressive attack on a territory, it jeopardized the structure in that area.  Said in market profile terminology, by mid morning we had a very blunt “poor low” which was susceptible to breakage.  It eventually did break, we found a sharp responsive buy to new multi-year swing highs, at this point going neutral (expecting the fade back to the mean), before finally giving way to heavy sell flow for a proper mean revision on the intermediate term time frame.  On the net, yesterday was seller controlled and we printed a neutral extreme profile.  This makes hypothesizing very simple today.

I have noted the key price levels I will be observing today on the following market profile chart:

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Nasdaq futures were up modestly this morning before giving up the gains as we rolled into 8am.  There are no economic events which align with this selling.  Instead it appears to simply be some early sell flow.  As we approach US cash open the Nasdaq futures are flat on a compressed 16.5 point range of trade.

Buyers pressed away from Friday’s range early yesterday morning before finding responsive selling back inside the range.  At this point expectation was for a move back to the micro composite volume point of control at 4066 but instead we found buyers who rejected the idea.  These buyers took us back up above the daily midpoint in the afternoon.  Overall price and value migrated up relative to Friday.

This is occurring inside intermediate term balance.  As this balance matures, now going on our 13^th session, expectation of a break increases.  As we head into Tuesday’s trade, we are priced in the upper tail of balance.  If buyers are not strong to initiate trade away from this area, then we are likely to go explore the lower boundaries of balance in short order.  I have highlighted the intermediate term balance below:

With that in mind, I have noted the key price levels I will be observing on the following market profile chart:

 

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Nasdaq futures are down just a touch premarket on an orderly session of price balance with a slightly below normal amount of volume transacting during the session.  We are set to hear Consumer Credit at 3pm today but have an otherwise quiet economic docket for the week.  UK GPD comes out Tuesday morning, China CPI late Wednesday, a Monthly Budget Statement at 2pm Thursday, and Retail sales and U. of M. Confidence numbers on Friday.

Long term, the Nasdaq continues to be bullish after printing an outside candle on the weekly chart.  The outside candle is often referred to as an “outside reversal” and in this case a “bearish engulfing” pattern.  The quirk to last week’s candle is the long wicks on both sides, especially the bottom.  This suggests a strong response to lower prices was able to press us well off the weekly lows.  The gap zone left behind 14 years ago is living up to the expectations of gap zones by providing fast trading action.  Overall, the market continues to sustain trade above the gap and we have to bear in mind how much energy was expended by the dip buyers and whether we see buyers initiating more risk this week:

Intermediate term we are fairly neutral at the moment.  This can be seen best on the following volume profile which encompasses eleven session of trade:

I have noted the short term price levels I will be observing using the market profile chart below:

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Today we are looking at the range statistics of the Nasdaq regular trading session.  Although Nasdaq futures trade around the clock on globex, our focus is primarily to trade the index when the equities underlying its value are also active.  Thus, this range analysis is conducted using the trading hours from 9:30-16:15 eastern time.  This data was pulled from the IQ feed servers and compiled using about five years of trade (3/16/2009 start date).

The data has been split into two categories, up days and down days.  This information is helpful when preparing your hypothesis on the day because you have a sense of what price levels are relevant and actionable, and which ones are beyond the average reach of the marketplace.

Some notable stats include:

• Average down day range: 35 points
• Average up day range: 29 points
• 2014 Average down day range: 45.5 points
• 2014 Average up day range: 32.5 points

Usually I will use a histogram to calculate a “normal” range, considering about 68% of occurrences as normal and anything else an outlier.  What appears to more relevant in this instance is to look at the data over time to see how ranges are trending.  I applied a 10-day moving average to the daily up and down ranges.  The average daily up range is at about a 5-year low at just under 20 points.  The average daily down range is just less than 40 points.  Thus recent trading has provided about double the daily range when trading lower than higher.  See below:

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Nasdsaq futures are up in initial response to a weaker-than-expected NFP data point this morning.  The news sent the dollar lower, treasuries higher, and equity prices to their high of the overnight session.  As we approach cash trade, there are also unconfirmed reports of a ceasefire protocol in The Ukraine.  The initial reaction to any sort of economic figure or news event is often difficult to glean insight into the auction.  You are usually better able to observe the reaction to the initial reaction.  Developing…

The intermediate term is balanced after trending higher for much of August.  Balance can be challenging to trade.  The risk you face is chasing longs up into the upper boundary, stopping out in the lower boundary, then going short into the lower boundary, only to again stop out somewhere near the mid.  Or you can stick with one side, wait for resolution, then adjust accordingly.  I have marked up key intermediate term prices on the following composite chart:

You can see how the pace of trade accelerated during the last two sessions relative to the tight, small profiles to the left of them.  The environment is improving for trading the Nasdaq futures.  I have noted the short term levels I will be observing on the following market profile chart:

 

 

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Nasdaq futures are up on overnight after starting out rather weak when trade initially opened in Europe.  Traders’ attentions were focused on the Euro Zone this morning, where we were set to hear from both the Bank of England and the European Central Bank (ECB).  The UK left their rates at historic lows and will remain steady with their asset purchase targets.  The surprise came from the ECB who dropped their bank rate 10 basis points to 0.05% as well as decreased their deposit facility rate to -0.20%.  The news sent the Euro dollar falling, the US dollar rising, and US equity indexes higher.  We also saw initial jobless claims at 8:30am which was a bit higher than expectations.

Thus far, the net result was about a 25 point range on normal volume in the Nasdaq globex session.

At 10am we have ISM Non-Manufacturing composite which is listed as a high-impact event.  Energy traders will have a whole slew of oil and gasoline data to digest at 11am, and there are some Fed speakers after the market close (no Yellen).

The intermediate term has come into balance.  The balance spans 9 sessions and can be seen on the following chart.  Below this balance the volume composite is very sparse, and prices below about 4050 are susceptible to fast moves.  However, above here, we are likely to see the balancing process age a bit.  See below:

I have noted the short term levels I will be observing on the following market profile chart:

 

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The Nasdaq futures are up overnight after printing a normal range on slightly above average but normal nonetheless volume.  The premarket economic calendar is empty but at 10am we have US Factory Orders and the Bank of Canada rate decision.  Later in the afternoon, at 2pm, The Fed Beige Book will come out.  After hours tonight the Bank of Japan is set to release their monetary policy statement and early tomorrow morning there are several central banking activities to keep in mind from both The Bank of England and the ECB.

We discuss day-types often and their implications.  Although yesterday was a normal variation with range extension lower, a day which normally would suggest seller control on the session, you have to be aware that none of these market profile terms are concrete.  They are simply ideas for us to assess the auction and who is participating and who might be in control and how good of a job they are doing.

Yesterday we nearly printed a neutral extreme to the upside.  The afternoon rally was well timed and buyers were able to sustain their push into the bell.  Their force was not overwhelming enough to press through the high, but the high on the session was of poor quality—another feather in the bull cap.  Conversely, the taper on the low of the session was clean, the rotations lower were smooth pushes lower as well, nearly perfectly compliant with a wave 3,4,5,a,b,c type reversal.  It was fairly clear by the end of lunch that the market had done a good job finding a buyer and the auction could start anew.

This is all hindsight.  What the market has done.  What else has it done?  On a larger timeframe we pressed higher through most of August, based out to end the month, and made a fresh thrust higher to start the month.  The beginning of the month has slightly bullish skew for equities, therefore the real intermediate term assessment takes place after 3-4 sessions.  For now, I have noted the key composite levels below:

The market appears to be keen on trying higher.  Over the last week volume has been stronger on green candles.  As far as price history goes, the Nasdaq composite overshot the 14 year gap from 2000 and is now in a bit of a fast zone from back in the dot com mania.  The market appears to be trying to find a seller up here by exploring higher.

Finally, I will be using the following market profile levels to aid my hypothesis process in determining what the market is likely to do from here:

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Nasdaq futures turned in a relatively normal session overnight after drifting higher a bit during the shortened Labor Day session.  As we approach cash trade in the US the Nasdaq futures are trading up about 7 points.

The only major economic release for today is slated for 10am when ISM Manufacturing and Construction Spending data are released.  Looking out on the week, we have Factory orders and The Fed Beige Book during tomorrow’s regular session.  Thursday we have an ECB rate decision before market open with a Draghi presser and US Jobless Claims.  Thursday we also have ISM Non-Manufacturing composite.  And finally Friday before market open we have Non-Farm Payrolls and Unemployment stats premarket, arguably the only economic data point worth observing aside from The Fed.

On a long timeframe, looking at the monthly volume profile prints, we can see how much progress was made during August.  Much of the thin profile makes sense if you consider how well the prices we auctioned back in July.  However some prices received very little consideration and might welcome a retest at some point in the month.  See below:

Looking at the intermediate term, we can see the market beginning to come into balance although buyers still control this timeframe.  The value migration higher began to slow last week.  Overall the structure just below current prices is well-auctioned and likely to provide support in the short term.  If we push down through it however, it would then be considered an overhang of supply.  I have noted the key intermediate price levels below:

Finally, I have marked up the market profile with short term levels I will be observing today.  One piece of context which gave me confidence to press long through the weekend was the high on Friday.  This was a prime example of a poor high, one vulnerable to be taken out.  I will likely merge the small Monday auction into Friday’s profile, but kept them separate for us to observe the poor high:

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During the week long market profile webinar we talked about ‘the story’ and how when we choose to focus on the market activity in the context of an auction we react in planned ways.  As the market moves we can constantly return to reading context by asking ourselves a few questions:

• What has the market done?
• What is it trying to do?
• How good of a job is it doing?

These questions help us answer the final question which determines how we react, if at all—what is the market likely to do from here?

You truly need to see this in action, like seeing a big rotation and running through the questions real time, to see the effect it has on your mental vision.  You return to these questions, you use market profile as a tool for seeing the auction, and the process provides a logical decision making process.

Probabilities can be just as logical a basis for decision making.  They are statistics derived from past market behavior and it is reasonable to include them as part of a decision process.  For example, if the overnight low breaks 89.52 % of the time and you have entered a short position which is working in your favor and is within a few points of the overnight low, then pressing for at least a 1-tick break of the overnight low makes sense, especially if the session has matured a bit, increasing the probability of a break.  These little inches we fight for add up to miles when it comes time to calculate expectancy.

Relying on these foundations (logos, as the Greeks called it) for trading will yield better results and a more objective eye.  Imagine your statistic does not fulfill because that is the simple nature of the markets.  This resistance to the laws of large numbers will speak to the context too.

Enough emphasis on why statistics matter, yes?  Without further adieu, I have performed a study on five years of trade in the Nasdaq futures.  The raw data has been pulled from the IQ Feed servers via their symbol @NQ# which is the continuous contract.  Some key points:

• Overnight high/low break occurred 89.52% of the time, with 73.28% of breaks occurring before noon
• The normal volume on an overnight session is between 17-39k contracts
• The normal range of an overnight session is between 16-46 points

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