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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There was plenty for the market to digest this week, and we started with paused action which eventually gave way to buying.  The week provided lots of high probability trades for the prepaired and patient morning trader, but the lunch hours and afternoon were much more challenging.  It begs one to question what there trading hours could be and reminds me of an ancient Chinese proverb:

If you must play, decide on three things at the start: the rules of the game, the stakes, and the quitting time.

Those are three point any trader should give serious thought to if they plan to take on the elite traders of the electronic markets.

Take a look at the opening swings, and see for yourself the affect they play as price walks along through time.

 

MONDAY:

TUESDAY:

WEDNESDAY:

 

THURSDAY:

FRIDAY:

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The Nasdaq 100 index houses the absolute finest in growth and risk stocks.  It includes the largest domestic and international non-financial securities listen on The Nasdaq Stock Market based on market capitalization.  Some of the big dogs are AAPL, FB, AMZN, BIDU, CSCO, MSFT, CMCSA, GILD, GMCR, QCOM, INTC, and YHOO.  For the full list of symbols involved, check out the link below:

http://www.nasdaq.com/quotes/nasdaq-100-stocks.aspx?col=4&dir=D

This index has some shades of value stocks in it, but for the most part these are massive, promising, growth companies.  When money flows into the index it suggests our market participants has a taste for popular, big timer, growth.  We could expect the lazy mutual fund managers to put down their cheese platters and stop schmoozing for a few minutes to enter their fresh AUM (assets under management) into the market at the start of the month, and as traders we sit around eagerly searching for these gluttonous flows of money.  The last few months they have been sort of weak, perhaps because people are either pulling some money away from the markets or not contributing their average allotment.

However, Thursday morning a huge unknown was removed from the market.  Everyone worries about the Euro-Zone and usually we make a big story about their odd economy.  However, they are taking the path of the United States, the path of free money and it has become very normal, almost an expectation of participants.  These actions are what EVERYONE is watching, and MOST OF THE TIME they lead to higher equity prices.  The employment data on Friday was a cherry on top, by no means a necessary to persuading the money into the market.

Anyhow, that is my view of the current investment conditions.  This is speculation based upon what I hear people who I consider wise to the game focusing most intently upon.  I like to focus intently on the auction.  And without further adieu, I want to show you what a strong auction with fresh buyers coming into the marketplace looks like.  See below:

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Nasdaq futures are trading higher after a very balanced session gave way to buying on a positive employment numbers.  This is not quite “pro gap” territory, so the possibility of playing the overnight gap fill is still in place.  However, taking that short trade may not be an easy endeavor in this environment.

Here’s a look at the short term auction, which is in buyer control:

I prefer trading inside the thick of volume profile, but when the contracts are trading at all time highs I must rely on measured moves.  Today’s upside targets are fibornacci extensions based upon the peak-to-trough of the contract.  It yield the following upside levels.   I have some prior composite support levels (quite a bit lower) noted as well:

I try not to do too much at these levels, instead enjoying the view and managing what I already have on.  Stay patient out there today folks.

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I went back live this week, trading the futures, and I wish I could tell you I was 100% plan compliant.  I deviated from my trading plan a few times and it resulted in some big losses.  Overall the week built confidence in my methodology and approach.  However, as always, there is significant room for mental improvement.  I avoided some past pitfalls and this week can be built upon with some serious homework and thinking.

It could have been a huge week in the books if only I could erase 1 or 2 missteps.  Tell me, isn’t it worth it to dissect and process and formulate rules based on your outliers?  It’s the difference between mediocrity and champion performance.  I intend to come out the other side of this game a champion.

Enough jawboning, below is my performance chart for the week.  I will be trading very light tomorrow in preparation for another marvelous water filled weekend in pure Michigan.

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