ES Analysis for 12/04/06

[ant 10]

The ES has been in an uptrend since July '06 with relatively short-lived retracements/consolidation along the way. However, the ES has now started to balance/bracket over the intermediate term. If the ES breaks 1378 to the downside, that would not be a good sign for the bulls. See the chart below. If it trades above 1409, that would signal a breakout of the intermediate-term trading range and continuation of the longer-term uptrend. This provides me with some market context so I would be alert for a breakout if the ES trades near its upper bracket limit.

 

 

Next, I identify the market condition. On the intermediate-term, the ES is currently in balance, so I will identify the key reference points of the bracket. The trading range I'm analyzing is from 11/7 to 12/1. The upper bracket limit is 1409 and the lower bracket limit is 1380; there are also two pronounced high volume nodes (HVNs) at 1404.50 and 1389.25. The ES is currently trading between these two HVNs so it is currently in balance on the daily timeframe. See the next chart below.

 

 

Finally, I look at market structure by analyzing the daily profiles of the last few days. The key reference areas are the buying tail at 1389.50-1387.50 and the selling tail at 1403-1404.50. The POC is not that pronounced so I will not give it much weight. The chart below shows the daily profiles.

 

 

Key Reference Areas for the ES on 12/4/06

When analyzing the composite and daily profiles, I try to line up as many key reference areas as possible since a confluence of levels usually provide more significant support/resistance levels.

 

• 1409 - Upper Bracket Limit
  
• 1403-1404.50 - Friday's selling tail and also contains the HVN of the composite profile (2nd chart above)
  
• 1389.50-1387.50 - Friday's buying tail and also contains the HVN of the composite profile (2nd chart above)
  
• 1380 - Lower Bracket Limit
  

 

Trade Plan for 12/4/06

In general, I will monitor market internals and price action as the ES approaches any of these key reference areas. My preference would be to go long at any support level below the price the ES is trading or to go long if the ES breaks out above 1409. However, I would also consider short trades. Prior to the trading day, I look at Globex to see where the market is going to open - within value or outside of value. One other observation, the ES seemed to have rebounded fairly strongly from its Friday's low. That is, it is exhibiting some trending behavior within the bracket, so I will be alert for a gap open and strength near the resistance levels. Another scenarios is that the ES just trades between the two HVNs. My trade strategy is usually to let the market tell me what it wants to do and then trade accordingly. Although I may have a bias at the beginning of the day, I will quickly adapt if the market is telling me I'm wrong. This is always a challenge.

 

Steidlmayer said it well in the book Markets and Market Logic. He said, "It is very important to visualize the many ways in which the market may unfold, rather than trying to forcast or predict how it will unfold. With a market understanding, you can begin to visualize each possibility, and what each would indicate to you about the market and your position."

 

Also note that trading ranges and trends occur in all timeframes, so depending on the timeframe a trader uses to trade, one trader may see a trading range whereas another one may see a trend. Even within a balance area, the market can form smaller balance areas. See the next chart for an illustration.