Nasdaq futures worked lower overnight after yesterday’s action which featured a low volume advance to new highs on the year.  The nature of the move yesterday suggests prices were driven by the shorter timeframe, perhaps a mix of day traders and 2-6 day intermediate term traders, who pressed beyond the highs a bit to run stops.  The question as we head into the tail end of the week is whether buyers can sustain trade above the VPOC of our current balance or if instead we will break through the formation and fill the gap left behind when Japan announced their stimulus package.

A brief spike higher and subsequent fade occurred around 5:30am when the Bank of England released their inflation report, and ahead on the docket for today we have ECB President Draghi speaking at 9am in Rome, and US Wholesale Inventories at 10am.  We are entering the thick of retail earnings today and tomorrow with M, JCP, WMT, and many others set to report their performance over the next two days.

The below daily chart of the Nasdaq shows how prices entered a grinding phase after a strong v-shape bounce.  The slow pace suggests the market accepting higher prices at best and waiting for additional information at the least.  The drift achieved the initial measured move target of 4186.25 to the tick before the close yesterday.  These levels are Fibonacci in nature and serve as guides to whether moves are algorithmically driven stop runs or real progress.  If we see strong selling taking us below our upper HVN at 4149.50 then sellers are opening the opportunity to trade into the air pocket below.  I have noted these observations on the following daily bar chart of the Nasdaq:

As cautious as the above statements may seem, the market has several traits supporting the buyers.  Value has migrated higher during the last four sessions, there is no sign of excess on the highs (a wick), and the longer term trend is up.  What buyers lack is strong volume during the advance.  On the below chart I have noted the key price levels I will be observing during today’s session:

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Volume overnight in the Nasdaq futures ran on the low end of normal as prices traded slightly higher on the session.  The economic calendar was fairly quiet with a few data points coming out of Japan.  The Yen trade balance beat expectations while Consumer Confidence is the east was lower than expected.

Most of the discussion surrounding volume centers around time-duration volume and often on a per day basis.  However given the right data, like raw tick data streaming from the IQ Feed servers, you can map other dimensions of volume like at-price and cumulative delta.

Volume at price produces the price levels where our attention might yield an area of interest to gauge sentiment and trade from.  Cumulative delta can show us who is more motivated to take action in the tape.

Yesterday the market gap slightly lower found responsive buyers.  These buyers were responsive to the open, but initiative in nature on the intermediate term.  They initiated risk away from the VPOC of the then 6-day (now 7-days mature) volume profile.  The resulting print pushed value to new highs.

This might be a bit less clear since doing away with the market profile charts.  However they were a bit redundant and using only the below presented chart frees up precious screen real estate and requires one less chart to monitor.  You might not as clearly see it as before, but Monday printed a P-shaped profile suggesting early OTF strength (active intermediate term buyer) which caused a short squeeze.  In the context of a downtrend, these often occur at-or-near a peak.  In the context of an uptrend they are not as effective.  All we know is value migrated higher but is still contained in the intermediate term balance.

The third dimension of volume is delta.  It can be seen in the bottom pane of my chart window and suggests buyers were the more active participants for the entire duration of the session.  That has been the case for six of the seven days of balance up here.  It could mean two things—a large seller is resting on the offer and absorbing all of this demand which creates sideways price action amidst motivated buyers.  Or it could suggest pressure building for another thrust higher.  If we continue to balance and delta cannot flip to negative then we are likely to continue grinding.

I have highlighted the key price levels I will be observing on the following volume profile mashup chart:

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Markets move in harmonics and fractals which produce events that are not necessarily repeated but without question have a certain rhyme.  Back in September there was a singular event you could point out on the Nasdaq chart which precluded the multi week trade lower.  Some call it a false move, others a stop run, but in auction theory we call it a failed auction.

The structure can be seen as taking out a prior high or low briefly, testing the waters beyond the reference point, before sharply reversing in the other direction.  It will not always produce the same outcome, however I now have a rule in place that insists I back off until this structure resolves itself.

We happen to have a failed auction print in place on the Nasdaq futures as we come into this week’s trade.  The swing high set during Monday’s trade was briefly breached on Wednesday only to quickly reverse lower.  Both times the new swing high was achieved via a gap higher to new highs which was subsequently faded lower.  The current structure is a bit different from the September event.  Here are the bullet point differences:

• September’s event was separated by eight sessions of trade and nearly a week and a half of time and volume buildup.  Last week’s was separated by two sessions within the same week.
• The Alibaba IPO was generating buzz the day the September failed auction took place

Returning our attention to the market, we start with a high timeframe and drill down closer and closer depending on our style of trade.  If you swing trade exclusively you likely only need to drill to the daily chart and perhaps a 15-minute chart for trigger points.

The weekly time frame shows wide indecision last week in a long term bullish market.  We are trading above the “14 year gap” left behind during the year 2000 dot com correction.  The following chart is of the actual Nasdaq composite:

On a daily chart of the front month Nasdaq futures contract (December ’14) we can see prices are trading on an island atop the strong V-shape recovery we recently printed.  An excess low printed and is shown as the long tail on Tuesday’s candle.  The trend over the last 2-3 days is flat while the trend of the last 2-3 weeks is up.  The gap up is still intact suggesting demand for equities remained present during all of last week’s trade.  I have noted a few other observations on the following daily bar chart:

The first addition I make when drilling down to the 15-minute volume profile “mash up” chart is drawing a volume profile which encompasses the six sessions of overlapping trade.  This will yield highly potent price levels where we are likely to see market behavior occur.  It also shows the auction health and structure on this time frame.  I have noted these price levels below:

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Below are the levels I will be observing as we gap higher into Monday’s range:

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Nasdaq futures traded lower overnight in a normal manner.  The largest blocks of order flow were to the sell side and as we approach US trade prices are trading below Monday’s range.  US Trade Balance numbers were lower than expected at 8:30am and received a somewhat muted response—there was a bit of responsive overnight buying shortly after the announcement.  We have Factory Orders set to release at 10am.

Coming into the new month traders had to come to terms with a large gap higher left behind on Friday’s trade.  The Monday trade also went gap up and we spent the entire session unable to close the overnight gap which led to some hesitance to take intraday longs by day traders.  With the market set to open inside of Friday’s range my primary expectation is for buyer to attempt to test higher and close the overnight gap up to 4156.75 before finding responsive sellers who defend the LVN zone from 4161.25 – 4160.75.

I am looking to see how aggressive sellers become and whether they are able to push prices below Friday’s low and if yes whether buyers are found leading to the formation of intermediate term balance or instead accelerate suggesting a sharp reaction of both Friday’s and Monday’s prices.  The upward progress made these last few weeks is stretched and whether the market begins accepting these prices via a slow and sideways balance or instead returns to the fast pace of October will be an important clue to the overall market sentiment.

I have highlighted the key price levels I will be observing on the following volume profile chart:

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Nasdaq futures are flat ahead of US trade after a benign session of trade.  Volume and range are both below the 1^st standard deviation of normal which is even more abnormal for the Sunday/Monday globex session.  As we enter a new month of trade the markets are working through earnings and we have a few economic events on the calendar.

Coming up today at 10am is ISM Manufacturing.  Tuesday premarket we will hear US Trade balance and at 10 US Factory orders.  Also after hours Tuesday, BOJ Governor Kuroda speaks in Tokyo and the verbiage will likely be scrutinized after last week’s stimulus news.  Wednesday premarket we have ADP Employment change which has been less consistent than in the past followed by 10am ISM Non-manufacturing Composite.  After hours Wednesday are BOJ October meeting minutes.  Thursday premarket we have ECB news including rate decision and a Draghi press conference.  And Friday premarket we have monthly Non-farm payrolls and US unemployment rate.

On a weekly chart of the Nasdaq Composite we can see the sheer size of the green candles printed the last two weeks.  These two candles suggest the hammer candle printed three weeks back is confirmed as a short term low.  Even if it was not, the distance traveled means sellers have their work cut out to revert long term control into their favor at the best or into balance at the least.  For now, the long term time frame is bullish.  Note also how we are back trading above the ‘gap-zone’ from 2000:

On the shorter term, we can see how the market spent three days building balance before the gap higher on Friday.  This balance is best seen as the green volume profile positioned to the left.  I have noted some measured move targets which, oddly enough, one of the targets from Friday morning ended up being an area where the market found support.  I have less conviction in these levels than auction/volume profile levels, but they do serve as a frame of reference when we trade in an area lacking price history.  I have noted these levels and a few other observations on the following volume profile mashup:

 

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Nasdaq futures were thrown out of balance overnight after the Bank of Japan announced they were expanding their massive stimulus package.  The reaction was large enough to put the index to new swing highs meaning participants are coming to market this morning at prices dramatically different from the closing bell. The volume and range on the globex session are beyond normal as you might expect putting us in pro gap territory.

On the economic calendar for today we have Chicago Purchasing Manager at 9:45am and U. of Michigan Confidence stats at 9:55.  We are also in the thick of earnings season as the month-end trade takes us into the weekend.

Prices at the open will be trading levels unseen since March of 2000.  Given the lack of price history available, I need to work using available support levels and measured move targets.  I have noted the measured moves and support levels I will be observing on the following volume profile mash up chart:

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Nasdaq futures started to drift lower overnight shortly after we heard data on German unemployment early this morning.  The resulting range on the entire session is still within the 1^st standard deviation of normal although volume picked up to levels we have not seen since the fast down markets of a few weeks ago.  At 8:30am the US quarterly GDP stats were released along with jobless claims and personal consumption.  GDP was better than expected in the third quarter and the other data were worse than expected and the net reaction was an aggressive responsive buy taking us nearly to the midpoint of the overnight session (4064).

The overnight session managed to press into Monday’s range before finding responsive buyers.  It will be interesting to see in the cash trade hours whether a retest of this overnight low occurs and how it is treated.  Since the gap higher Tuesday morning I have noted that we are provided with a unique opportunity to gauge demand.  How the market trades relative to this gap, mainly if buyers sharply reject us from Monday’s clean balance, will be a clear clue of short term sentiment.

I present only the volume profile mashup chart today.  Notice how well recent action has adhered to the price levels noted on the chart.  This is a clue that the intermediate term and short term time frame participants are the primary drivers of market rotation.  If instead we begin seeing large moves which ignore or steamroll these levels, then we know an even higher time frame is participating and it makes sense to step out of their way.  I made no adjustments to these levels from yesterday, they are still key reference points as we go about trade:

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A discrepancy between the closing price and settlement price on the Nasdaq futures resulted in an odd no-volume push lower.  This may or may not have something to do with the big drop in Facebook shares after their earnings report motivated participants to sell the stock down significantly in after hours trade.  However, that action will slowly move to the back burner as we enter US trade.  Set for announcement this afternoon are several Fed data points.  We also have crude oil inventories at 10:30am.

The price spans our market has traversed lately are huge.  This is not an environment we have traded in, velocity and rotation size-wise, since perhaps 2011, more so like the 2009 bottom.  Put simply, the market is acting either like prior major bottoms or like an inflection point.  You can thus see how these recent events might be unsettling to speculators.  The directional ramifications these conditions typically preclude are major.

I am keeping my bias with the market’s biggest punch.  This is helps me accept conditions and adjust as the market dictates.  Currently, the uptrend is steep long term and the largest most recent rotation is up.  There are warning signs around, but I will reserve caution for when I have proof in the price action that sellers are regaining an edge.  What are my clues?  Retracements, especially the 50 percent retracement.  I have noted the 50% retracement as well as a few other observations on the following daily bar chart of the Nasdaq futures:

If you were to ask me one week ago today whether we would be templating the volume profile printed on the day BABA went public today I would suggest it was very unlikely.  Yet, here we are observing the key price levels left behind on the swing high volume profile.  I have noted these levels, as well as other carefully selected levels on the following volume profile mash up chart:

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There comes a point in any auction where higher prices cut off activity and more ‘noise’ must be introduced to give the perception of a continuing auction.  In a traditional one-way auction, say for a vintage automobile, the auctioneer will begin repeating words or adding details or pointing around manically to create an illusion of activity when price has actually stalled.  In a two-way auction like the futures we start to see overlapping value, indecisive doji candles, range compression, and eventually value compression or rejection.

The last three sessions in the Nasdaq did not quite demonstrate these traits yet.  Instead we are seeing a smooth migration higher in value.  As we approach US cash trade prices are set to gap higher.  Some of the gains has been paired back after a weaker than expected Durable Goods Orders (Sep) number came out.  However prices are still trading outside of yesterday’s range which creates an opportunity to clearly observe demand.

As we trade early on there will be clues as to whether the auction needs to continue exploring higher to find sellers or whether we have arrived at a location where sellers are motivated and present and willing to introduce enough supply to the market to overwhelm demand. First, the open type—is it an aggressive selling response from the minute the bell rings?  Or do we see an open auction with two-timeframe participation?  Next, do we trade into yesterday’s range?  Or is demand so strong prices cannot even return to the prior range?  Then, if we trade the range do we close the overnight gap, the VPOC, VAL?  And so on, we go, down the line, always observing the nature by which these events take place if in fact they do.

A unique opportunity to observe demand today, you see?

Keep in mind we have Consumer Confidence at 10am, MBA Mortgage Applications premarket tomorrow at 7am, Facebook earnings AMC, and tomorrow is a big Fed day-type afternoon which at some point is likely to produce a pause in the market.  At least, that is the expectation.

The second leg lower to follow the big, motivated knife lower in the Nasdaq came into question on 10/21 when we started the day with prices gap higher well above the midpoint of the move.  There are many useful Fibonacci numbers, I suppose, but the midpoint is my favorite checkpoint.  If sellers were truly motivated, then we should not have been trading back up through the mid.  Now the inverse is true, we have a midpoint to this up-V, it can be seen as the thick blue line on the below chart.  It is far away, as you might imagine, after such a large move.  This risk now, to longs, is this distance, as revision now begins to favor the seller.  However, auction theory, as noted in the lesson above, suggests we can be cautiously bullish.  See the below daily chart which has two air pockets and a midpoint noted:

Bringing our eyes a bit closer, I have noted the price levels I will be observing today on the following volume profile mashup chart:

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