ES Move Suspect?!? (9/4/07)

[ant 10]

In this post http://www.traderslaboratory.com/forums/f6/es-analysis-for-8-30-in-2371.html#post18091, I commented:

 

On 8/31, the ES was balanced again and put in higher value. Although it stopped at the upper extreme of the balance area at 1484.75, we could see a break out of that balance area and a play for 1510.50. I haven't done my analysis for 9/4, but this is probably what I would be looking for. With a symmetric, balanced day like 8/31, one should trade with the directional move away from balance (up or down).

 

Well today, the ES broke out of the balance area and traded to a high 1499.25. Although I had a target of 1510.50, I didn't expect it to get there in one day. Frankly, I didn't expect it to get to 1499 either. However, there were clues early in the day that should have kept a trader on the right side (long side) of the market today. For example,

 

• The ES opened around the previous day's VAL and auctioned up from the opening bell. Trading above the VAH on healthy volume provided confirmation for existing longs and the possibility of a directional move away from balance. The ES then traded above the upper bracket limit, again on good volume, where price was accepted.
  
• The ES was "one timeframing" for most of the day as it was a trend day up, whose daily Market Profile appeared elongated all day long. While a market is "one timeframing," it is usually wise to not try to fade the market. If you don't want to go with the directional move, then at least stand aside.
  
• The shape of the Market Profile graphic for 8/31 was fairly symmetrical and balanced. See chart below. Again, this points to the potential (not guarantee - we could continue to balance) that a directional move could develop. The ES was also trading near the upper bracket limit.
  

 

 

See the chart below for an illustration of today's elongated Market Profile graphic (chart 1), 5-min chart of today's price action (chart 2), and the balance area the ES broke out of (chart 3).

 

 

Although we traded above the balance area today, which should be considered bullish, there are areas of concern for the bulls, IMO. Since 8/16, the ES has been trading up but on the lightest volume of the year. See the chart below which shows the volume for all NYSE issues.

 

 

Secondly, the composite Market Profile from 8/16 to 9/4 has formed a P-shape, which indicates short covering. This doesn't mean that the market has to turn on a dime though. See the chart below.

 

 

In my opinion, trading the long side of the ES is becoming increasingly risky, and I think I will probably be treading softly on the long side in the ES. I wouldn't be surprised if today was a false breakout. Today, the ES closed about 10 points off its daily high which is a sign of profit taking, I think. But will the long liquidation be joined by new selling? I don't know yet. Overnight trading might provide some clues tomorrow morning. I will definitely be looking for weakness on any attempt to rally tomorrow. My guess (which I wouldn't use to trade off because it is a prediction), is that we probably won't see the ES trade above 1510.50, if it even gets there.

 

What do you think? Am I way off base here? Look forward to your comments.

[Dogpile 10]

agree ant...

 

'day timeframe trend day up' but profile shape was 'P' -- generally means some long-term selling and is early warning sign that market might be struggling to auction up.

 

though not identical -- might be similar to Daltons example on pages 120-122 (Day 6 in 'Markets In Profile')...

 

despite the late move down, we closed above VWAP and built higher value. there has been no sustained selling below VWAP in 4 days now. as a Taylor disciple -- I will be looking for a 'high to low' day tomorrow -- but trying not to be too biased and just take the set-ups as they come of course...

 

btw, in MIP -- the day after day 6 was a balancing day that built higher value -- then a trend day down --- that would be ok with me...

[ant 10]

btw, in MIP -- the day after day 6 was a balancing day that built higher value -- then a trend day down --- that would be ok with me...

 

I like that comparison. Perhaps we will have a balancing (contraction) day tomorrow (with a high near 1510.50) since we had a trend day (expansion) today. I too will take a trend day down the following day in the direction of the intermediate-term trend. The chart below provides a reference to day 6 that Dogpile referred to.

 

[Dogpile 10]

especially juicy is the fact that both patterns (June 2006 and now) are also 'A-B-C up' patterns on daily timeframe...

[darthtrader 10]

cool stuff, i've been trying to plug away at Dalton a little bit at a time and its finally starting to make sense(or at least less like trying to read egyptian). ant, what do you mean by "one timeframing" though? The next TPO isn't crossing over the previous much?

Do you guys find the whole lettering view to be useless? Just focus on the way the profile is developing overall?

[ant 10]

cool stuff, i've been trying to plug away at Dalton a little bit at a time and its finally starting to make sense(or at least less like trying to read egyptian). ant, what do you mean by "one timeframing" though? The next TPO isn't crossing over the previous much?

Do you guys find the whole lettering view to be useless? Just focus on the way the profile is developing overall?

 

"One timeframing" is when there is only a single longer timeframe trader in the market (buyers or sellers). When buyers are in control, the current bar does not violate the previous bar's low by more than a tick (vice versa for sellers). The lettering is useful for understanding what happened in a specific 30 min time period. Without the lettering, you wouldn't know what happened earlier or later in the day by looking at the profile. That's all.

 

Use the Market Profile graphic as a tool to understand market behavior. Forget about trying to identify setups using Market Profile, first try to learn to read the market through the Market Profile. For example, look at the shape (e.g., symmetric or squat means balancing, elongated means trending, p-shape means short covering, b-shape means long liquidation, etc). Pay attention to tails, single prints, range extension, gaps (invisible tail), value areas, high/low volume areas, spikes, etc. and learn to interpret what each of these components is telling you about the market auction. Learn to identify the attempted direction and then gauge it's performance in moving in that direction. You can use volume analysis when the attempted direction is clear and use the profile shape when the attempted direction is not so clear. Also, look at value area placement. Again, the goal is to try to understand what is happening in the market so that you can position yourself with order flow. Once you have market understanding, then you can look for asymmetric trade opportunities (i.e., trades that have a chance of 50% or more of winning and have a win/loss ratio of 2 to 1 or more). One of the basic trades in Market Profile is to identify brackets and balance areas and then fade the extremes or play the breakout. But first, you need to understand context. Finally, learn about the four stages of market development as described by Steidlmayer (i.e., balance, transition to trend, trend, trend end - back to balance). Market Profile really is a great tool for understand market behavior. Hope this helps.

[darthtrader 10]

Hey Ant, fantastic response. You just raised a million questions in my head but I saved your response to my drive, I'll get back to you in a few months.

In Dalton MOM terms, literally today I just learned how to read sheet music as opposed to randomly hitting keys on a piano. Your talking about really playing here.

For some reason when I opened your second chart it did not display the lettered profile intially. I completely get the TPO concept after today, when I didn't see that on the chart I thought what I had just learned today was a waste.

Mentioning Steidlmayer though...

How would you go about learning MP if you had to start again? I figured i would try to understand MOM, then Markets in Profile then maybe get Steidlmayer for fun.

The opening range stuff in Mind Over Markets is basically what just clicked for me today, then everything previous clicked and I could see how things will probly progress now. What would be the most effecient path from here in your opinion book wise?

[darthtrader 10]

Also, out of curiosity, have you guys ever messed around with different TPO than 30 minutes?

The first time I ran across pivots was in The Logical Trader by Mark Fisher(in a round about way led me to this board). I was browsing it again tonight and he mentions he believes time is even more important than price. If the market didn't have the velocity time wise to move in the direction and in the time frame you expected, get out, move on.

If that is true though then 30 minutes seems arbitrary MP wise.

What do you guys think about experimenting with optimal/variable TPO length according to market volatility/velocity MP wise?

[steve46 12]

I really enjoyed "Mind Over Markets". Inspired me to write Dalton a note. Unfortunately I did not receive the courtesy of a reply

 

Anyway, although I do monitor MP charts periodically, I find that monitoring intraday volume also works well. Specifically, I use a method I read about in Brett Steenbarger's blog "Traderfeed". What he (Brett) suggested was to lookback 20 days, averaging intraday volume on a 15 minute basis. What you would do is to compare what you see to this 20 day average to determine whether institutions are playing that day or standing on the sidelines. Here is a link for those interested

 

http://traderfeed.blogspot.com/2007/04/volume-and-opportunity-in-stock-market.html

 

For what its worth, I lookback 20 days and break out the average volume in five (5) minute increments. I have found a couple of interesting things using this method. One thing that becomes apparent is that the market "breathes" volume. That is to say, volume seems to drop significantly just prior to what I charaterize as an "impulse" move. It drops somewhat, then picks up as price develops momentum. As a move loses momentum, you can see volume expand and then fall off. Typically, these changes correspond to increases or decreases in the size of the bar or candle.

 

As regards today's move, I believe it took place on slightly low volume (daily basis) so I am suspect that institutions are selling it, and/or using the opportunity to modify positions. For instance, I took profits on several existing positions for tax reasons.

 

Good luck in the markets

Steve

[ant 10]

Anyway, although I do monitor MP charts periodically, I find that monitoring intraday volume also works well. Specifically, I use a method I read about in Brett Steenbarger's blog "Traderfeed". What he (Brett) suggested was to lookback 20 days, averaging intraday volume on a 15 minute basis. What you would do is to compare what you see to this 20 day average to determine whether institutions are playing that day or standing on the sidelines. Here is a link for those interested

 

http://traderfeed.blogspot.com/2007/04/volume-and-opportunity-in-stock-market.html

 

For what its worth, I lookback 20 days and break out the average volume in five (5) minute increments.

 

That's a good suggestion. In fact, I wrote an indicator to do just that. Check out the chart below. The yellow dot by each volume bar indicates the average volume for that 5-min time period looking back 20 days.

 

 

As regards today's move, I believe it took place on slightly low volume (daily basis) so I am suspect that institutions are selling it, and/or using the opportunity to modify positions. For instance, I took profits on several existing positions for tax reasons.

 

That's a good point Steve. Thanks for sharing.

[ant 10]

Let's review the market action in the ES...

 

Yesterday (9/4), the ES traded above the upper balance area limit at 1484.75 and traded as high as 1499.25. It was a trend day up. However, there was concern for the bulls because the move occured on low volume and the ES closed about 10 points off its daily highs. After yesterday's trading, the upside in the ES seemed limited. During the evening and overnight session, the ES sold off about another 10 points. Since volume in the overnight session is light, one should consider what occurs in that session with a grain of salt.

 

Today (9/5), the ES gapped down in the open about 10 points, which put it back in the balance area - a potential false breakout. Throughout the day, the ES barely retraced any of the overnight losses, and in fact, traded lower. This indicates that the lower overnight prices have been accepted. See the chart below with the overnight and today's Market Profile and compare today's trading prices to those of the overnight session.

 

 

Basically, today's trading range was contained within the upper balance area limit and the gap/buying tail from 8/31. See the chart below.

 

 

Today's profile shape was "squat," meaning that it was a fairly tight range from the daily high to the daily low and it was wide from left to right. This indicates a balanced market in the day timeframe. As mentioned before, the play for tomorrow should be to trade with any directional move away from balance. Today's tight range is unlikely to hold tomorrow. Today's volume was also on the low end, but higher than yesterday. Although volume analysis is not as useful in a balanced market (the shape of the profile is more important), what I find interesting is that yesterday we had a trend day, which usually occurs on high volume, but it had lower volume than the balancing day from today (see chart below). Is this detail or nuance? You decide. Again, this market does not appear to bode well for the bulls and we should use this information as "context", not blindly short the market tomorrow.

 

 

If we look at the composite profile from 8/20 to 9/5, the market appears balanced (i.e., a bell curve distribution), to break out of this balance area requires power (i.e., volume), something that the market has not been showing us. I don't know if the market will break out to the upside tomorrow, but it's not looking too good right now. We'll have to consider the overnight session and the developing trading tomorrow. Again, go with the directional move away from today's balancing day, but be aware of the possibility that the market might be capped at 1484.75, unless it can muster enough volume to break out.

 

 

Note: My analysis is based on the Market Profile concepts described in Mind over Markets and Markets in Profile. I have been learning and practicing trading with Market Profile since Feb. 2006 and am still developing as a Market Profile trader. Writing down my market analysis is very useful and helps improve my market understanding. I suggest that all traders do this regardless of trading methodology. My trading has improved dramatically since I started doing this and being prepared for the next trading day. Market understanding and knowing yourself are perhaps the two biggest obstacles to consistent, profitable trading. For example, even if you can analyze a market accurately and identify some big moves, do you have what it takes to hold to trades long enough to capitalize on those big moves requiring you to withstand the adverse moves against you? The latter part is proving to be much tougher.

 

As always, feel free to agree or disagree with any part of my analysis.

 

In my next post, I will review how a Market Profile trader could have traded today's ES session. Stay tuned.

[Dogpile 10]

for anyone familiar with Art Collins book... we have a 'cap formation' that has formed. he swears by this pattern as robust across virtually every futures contract he has tested it on... essentially, its a 3 bar bearish daily pattern. where c<c[1] and c[1]>c[2] and h<h[1] and h[1]>h[2].. see attachment and some strategy results based on shorting the open and covering the close. the key here is just to think of this as a bearish bias over next 1-2 days --- sometimes it needs 2 days to play out -- other times it just doesn't work.

 

also, notice that we have a Taylor bullish bias for tomorrow -- Rashke calls this a 'pinball buy'... in general - I think we have a bearish set-up due to the very solid 'cap' structure and I will be looking for that -- but we might need another day before a bearish bias plays out due to the 'pinball' buy pressure. Just be ready to take advantage of a downside move over the next 2 days should it start to roll that way -- and know that you have potential for a big win with this daily structure.

[Blu-Ray 10]

Once again Ant, Excellent analysis.....keep it coming:)

 

Just one quick question, when you do the composite profile, why do you pick that particular date (20th)?

 

Cheers

 

Blu-Ray

[Dogpile 10]

re-post -- other attachments in post didn't seem to work

 

http://bp3.blogger.com/_5h-SWVGx6Ms/Rt8oxB72PKI/AAAAAAAAAaE/eGMuT36Ob9s/s1600-h/NQ+Cap+Pattern+for+9-6-07+and+9-7-07.png

[Blu-Ray 10]

I still can't seem to open the first attachment

[Dogpile 10]

added a link now -- Traders Lab just doesn't seem to like that attachment -- I give up after 2 tries -- link is the same thing

 

http://bp3.blogger.com/_5h-SWVGx6Ms/Rt8oxB72PKI/AAAAAAAAAaE/eGMuT36Ob9s/s1600-h/NQ+Cap+Pattern+for+9-6-07+and+9-7-07.png

[ant 10]

Interesting thoughts Dogpile. I think Toby Crabel has a similar 3-day pattern in his book and Raschke also has a similar setup call 3-day triangle. I like the trade statistics! How big was the trade target and stop? Thanks.

[ant 10]

Just one quick question, when you do the composite profile, why do you pick that particular date (20th)?

 

Good question Blu-Ray. I really should have started it from the swing low on 8/16, but I consider that day to be excess. Take a look at this chart.

[Dogpile 10]

<<How big was the trade target and stop? >>

 

there was no target or stop used. just sell opening price, buy closing price. I ran it also for holding until 'following day close' (2 day hold) but it came out about the same -- it captured more big down days but that was offset by the times it didn't. I am not a mechnical trader.

 

just noticed this one that showed up too -- the Feb meltdown came 2 days after a 'cap'...

 

btw, I have filtered out the days when the trend day down occurs the day after the middle high day -- technically, that is still a 'cap' as 'how far down' the 3rd day goes doesn't matter to technically qualify as a cap --- but I have filtered those days out thinking that the horse has left the barn -- the good kind of cap can be thought of as kind of a slow motion top that has chopped up lots of the over-eager shorts before finally having the plunge...

 

2 other things: the strategy results are for 2 NQ contracts -- not 1 -- as I always do that due to the small tick value of the NQ e-mini -- otherwise it kind of understates the potential relative to ES.... also, fyi -- those results are for the last 5 years.

[ant 10]

So how could one have traded the ES today (9/5)? First, I would have identified the key reference areas above and below the ES open, which were:

 

• the gap above the opening
  
• the upper limit of the balance area above the opening
  
• yesterday's large buying tail below the opening (I will ignore this one, because the tail was erased within the Initial Balance period.)
  
• the gap/buying tail from 8/31 below the opening
  

 

These key reference areas were expected to provide support/resistance today. As always, one should monitor price action as price approaches those levels to determine whether they would hold or not. For now, just keep those levels in the back of your mind. See chart below.

 

 

After the Initial Balance (IB) formed, we had Range Extension (RE) to the downside. Note the low of the first swing low of the RE at 1469.75. The market then started to trade into the IB again (exhibiting low confidence). Note the high of the first swing high into the IB range at 1478.50. At this point in the day, the ES is developing into a Normal Variation Day (a high occurrence type of day). Yes, this day could have transformed into a neutral day or double distribution day, but at this time of the day, I was focused on the NVD since the swing high into the IB had been formed. Now, here is the key. Usually, price will be bounded by the swing low and swing high mentioned above for the rest of the day. See chart below. The play for the day was to fade the extremes of that trading range.

 

 

Let's take a look at the ES in a 5-min chart. You can see the trade opportunities that existed throughout the day. However, if one considered the swing high to be the one by the yellow dotted line, then one extra trade opprotunity could have been had. Again, the day could have transformed into a neutral day or double distribution day, but I was monitoring price action at the extremes. There were some nice divergences that occurred at the extremes, which gave me confidence to enter the trades. The lower range of the day reached the lower reference areas mentioned above, but the reference areas above the open did not really come into play today. However, the selling tail that occurred within the IB and the opening price did provide resistance. The re-entry into the IB signaled hesitation by the sellers and I was thinking "low confidence action" and a potential for a trading range today. The profit target of these trades were the midpoint of the trading range. I won't get into entry tactics here, but I think you get the idea. If you trade multiple contracts, you could have scaled out part at the midpoint and the balance near the other extreme. Although the daily range was low, it still turned out to be a very nice trading day today.

 

 

Although I'm presenting this strategy at the end of the trading day, the intent is for people, who use MP, to consider these trade setups in the future.

[ant 10]

Again, go with the directional move away from today's balancing day, but be aware of the possibility that the market might be capped at 1484.75, unless it can muster enough volume to break out.

 

Correction: In my post above, I stated that the upper bracket limit is 1484.75. That is incorrect because yesterday's trading (9/4) extended the range to 1499.25. So that is a key reference area for tomorrow, not 1484.75.

 

By the way, when a market is balanced like the ES was today, it is usually a good idea to trade in the direction of any gap opening, if it exists.

[Blu-Ray 10]

Although I'm presenting this strategy at the end of the trading day, the intent is for people, who use MP, to consider these trade setups in the future.

 

Ant

 

Superb in-depth analysis, thank you I really appreciate it.

 

Cheers

 

Blu-Ray

[ant 10]

So far yesterday's selling tail and the overnight high provided resistance. It looks like the market will explore yesterday's lower range. Be alert for a directional move beyond the low (buying tail) of 8/31 at 1467.75.

 

If volume confirms the move down, there is support at 1462, a prominent POC from 8/30, and 1454.75, a buying tail from 8/30.

[ant 10]

So far the day type of the ES today is a Normal Day. Despite its name, a normal day occurs about 5% of the time, so the odds favor range extension. Look for one of the IB extremes to be penetrated for a potential trade.

[ant 10]

Good volume at 11:25am EST (5-min chart) in the ES.