So What Is The Market Doing Now?

[Soultrader 12]

Where are we headed? Are we still consolidating? Was today a warning signal for the bulls? Change in direction?

 

We saw very interesting action today with the ES, YM , and ER2 all falling below value and never looking back. Does anyone else smell the shift in market sentiment? The past 8 trading sessions has been something new.... we havent seen anything like this in the past few months.

 

Starting on Oct.23rd to Oct Oct.27, the YM had an overlapping value.

 

 

Then from Oct.30 to Nov. 1st we are seeing lower value placement. What is especially interesting is the higher volume on the lower value placement days. From the trend formation in July, volume had been a good confirming tool for the steady uptrend we had. We saw higher volume on the rallies and lighter volume on the pullbacks. Over the past few days we have seen just the opposite with higher volume on the sell-side. A warning signal???

 

 

 

Are bulls now liquidating their long positions? This is something we need to keep in mind. The YM will now go on to test the 20 period EMA and the trendline cluster. This will be a crucial make or break point. Let's take a look at some indicators on the daily charts.

 

See chart below: The MACD is a great tool for the daily charts. In the chart below, notice the cross in the MACD and the histograms below zero. The RSI is also coming down below the 70 line. A combination of warning signals exist from a technical point of view.

 

 

YM Trading Plan

 

As traders how can we monetize from these pieces of information? Let's try to build a trading plan. Let's take a look at yesterdays action.

 

The YM saw price rejection above value in the opening 30min. This lead to a decline into value and then a final rejection to the downside. The POC and VAL should act as a key resistance point for tomorrow.

 

Theres plenty of room for the markets to go down. Any further decline should take us to the 12000 mark offering plenty of opportunities. In my opinion, the short sellers are late coming in into this decline. The longs started liquidating early and now the shorts are jumping in. Why?

 

This is because we did not have any key price levels to the upside on the dow. The YM took off to new highs with uncharted territory. Shorts need a little confirmation before they can start entering the markets. Therefore, I am not expecting a short covering yet.

 

My bias is going to be on the short side. So my trading plan will be to look for short setups. The VAL or POC is number one. The previous days low offers another opportunity. 10/31 VAL is also in line with 10/30 single print tails. All of these areas are very close to one another and sellers will be looking at these levels.

 

Be on the lookout for the upcoming trading days. Try to capture the clues the markets give us. Each infrormation is a small piece of the puzzle. The faster we figure out the big picture, the better off we are as traders.

 

Good luck and best of trading.

 

Soultrader

[Gav 10]

Very interesting insight of market condition using market profile. Good post!

 

Gav

[TinGull 10]

Cash markets for the most part are losing their daily trendlines, and VIX lost it's downtrend as well...so we should be seeing more downside moves ahead of us. I always love playing the short side anyways

[Soultrader 12]

Let's take a look at a daily chart again. Notice the high volume coming in on the sell-side again. We are now testing the trendline made from July and will be KEY to watch this level. We clearly are having long liquidation and without new market interest this can be a clear warning signal.

 

 

Now lets take a look at the Market Profile chart. We are now seeing 4 days of lower value placement with decent volume. A clear warning signal? I think so.... we need to watch carefully on Friday and the following week. The markets have been moving in a consolidation to the downside for some time. Any break below the trendline and we can finally start seeing some decent trend days to the downside.

 

 

I will be very flexible the next following trading sessions. I am looking at short setups but at the same time watching out for any bounce. Technically speaking the charts tell me of many warning signals. Should be interesting.

[protrader 10]

looks like we are retesting the high on lighter volumes, going down? See how we end the day.

[Soultrader 12]

yes. I am looking at it very carefully. Im thinking a possible short covering and a further decline. Will keep you posted.

[protrader 10]

i think i may buy some sds , ultrashort s&p 500 pro shares, there a mind twister. trade 200% the inverse of the s&p.

[Soultrader 12]

Here's some updates. On 11/06 and 11/07 we had a nice rally of over 200 points. We recovered the 6-7 days of decline in only 2 days. Pretty impressive.

 

Are we seeing short covering? Or did the bulls step in to support the bigger trend? On 11/06 and 11/07 we had a P profile on a Market Profile chart. This definitely alerted me of a possible short covering.

 

 

Should be interesting to see what the market does today. Premarket action has dropped prices below value creating a nice little gap. I would be cautious fading this gap though....

 

Good luck and best of trading.

[TinGull 10]

Forming another P profile today. Adding to suspense.

[Soultrader 12]

Hey Tin,

 

From my understanding a P profile is only valid following a downtrend. We are forming lower value placement today. So Im not sure what this means... will need to ask ant for this.

[ant 10]

In short, a p-shaped profile is typically seen in an uptrend and a b-shaped profile is typically seen in a downtrend.

 

According to Steidlmayer, the four steps of market activity are:

 

1. Vertical movement up or down - the market establishes a series of prices in one direction (i.e., Trending or Vertical Development).
   
2. The market finds a price that stops the directional movement. Essentially. the market moves far enough where it shuts off buying or selling.
   
3. The market begins to move sideways around the stopping price. That is, the market develops one end of the distribution. This is where the market forms a p-shaped profile in an uptrend or a b-shaped profile in a downtrend.
   
4. The market moves to efficiency and begins to form a bell-shaped curve over the entire range of step 1. Essentially, the market is filling in the 'p' or 'b' shaped formation (i.e., Balancing or Horizontal Development).
   

 

The markets are in a constant cycle moving from balance to imbalance. I developed my trading plan around these four steps of market development and adjust my trading strategy accordingly. I think it is important for all traders to start their market analysis by determining the market condition.

 

Steidlmayer also refers to a concept called "Minus Development", which occurs when the four steps do not occur in sequence or the market skips a step. For example, a market can start an uptrend, move far enough to shut off buying, and then balance around the stopping point forming a p-shaped profile. Step 4 may not occur because the market continues the uptrend. If you review the trading in the YM during the month of October, you'll see that this is what happened as it continued the uptrend. See the chart below.

 

 

Having said that, I believe what TinGull is referring to is that the YM is forming another p-shaped profile as seen in the chart below. If the YM trades between the two nodes shown in the profile, then it will complete its p-shaped profile. The question then becomes, will the YM continue its uptrend (step 1) as it has been doing or will it move to step 4 and fill out a larger distribution. TinGull, did I represent your point accurately?

 

 

Comments/corrections appreciated.

[namstrader 10]

thanks ant, I wish you posted more often on the MP, I am a convert thanks to you with your sharing of the imported analysis techique for TS. Big Time thank you!

[Soultrader 12]

Great explanation ant. Several thoughts.... Dalton mentioned a "P" profile usually forms after a downtrend. Basically a P profile occurs in an uptrend but is followed from a downtrend. (had to hit the books pg. 259)

 

He further mentions old business have finished short covering and new business is not entering the market due to high prices. Hence he refers to it as a "poor buyer continuation."

 

The one thing I dont understand is a P formation that develops with lower value placement. Aren't P formation valid only when they develop with higher value placement than the previous day? (I just took a look at my charts and noticed the YM no longer has a P formation. But still an interesting question)

[ant 10]

namstrader, thank you for the kind words. I'm glad you find my posts helpful.

[ant 10]

Soultrader, thanks for the question.

 

On page 259 of Mind over Markets, Dalton described a short covering scenario (from 1/26/89 to 2/1/89) where Soybeans were in a downtrend, but then rallied due to short covering. During this retracement, Soybeans formed a "P" formation when the buying auction stalled. It then started to head down again. See the chart below. The area within the rectangle is the short covering rally that stalled. If the individual days are aggregated together, the "P" formation becomes easier to visualize. So on the shorter-term timeframe, Soybeans were in an uptrend. On the longer-term timeframe, Soybeans were in a downtrend. Timeframes and market context are very important in my analysis.

 

 

As the "P" is forming, the market is basically balancing at one end of the distribution so I would expect value area placement to be higher, lower or overlapping. The ES chart below is an example of this. Note the "P" formation from 11/06 to 11/09 and notice that the value are placement for the last three days was higher and lower (when compared to the previous day).

 

[Soultrader 12]

Thank you Antonio. Your MP knowledge base is amazing. Time for me to reread Mind Over Markets.