Am I being aggressive….feeling chippy? Not really, so why did say this? Let me do some explaining.
Readers know I am a short-term trader as are most of the people I follow on the Twitter. What I am about to write about is context for a day trader. Today is one of those days where it looks like every 4 ticks lower since the open there are the “is this the low” kind of tweets coming through the stream and lots of bottom pickers. This is very common when gaps are this large down on the open. I don’t recall seeing this many people trying to find the bottom on 1/20. I don’t make anything out of that statement in terms of market direction I simply find it interesting to watch the behavior.
Let’s review some background information we had coming into today
- On Tuesday, Wednesday, and Thursday of last week during RTH (Regular Trading Hours or the “pit session) we saw the ES POC (point of control) stacked on top of itself between roughly 1903 and 1906. The market was experiencing relatively large ranges in those sessions, as has become the norm this year, but from a volume perspective we were trading in balance those days. Prior to those sessions we had built a strong volume point of control at 1931 so my thinking as I’m watching that volume get stacked between 1903-1906 is that we are building energy to go re-auction 1931 again. Many buyers AND sellers considered that zone (1903-1906) as a fair place to transact…eventually one side is wrong and they give up their positions. I think at Thursday’s close it’s going to be higher and recent sellers will likely be the ones to give up first.
- That idea was clearly wrong for Friday. Was Friday hard to read given my first idea? Not really. Did I get killed Friday? Nope. Lets take a look at what the market did instead:
So what are we looking at here? I’ve got last Thursday’s profile to the left. On Friday we put in the high print of RTH right on the open at 1905.25 and the rest, as they say, is history. The high print shows rejection and a lack of interest from buyers in transacting above the previous days point of control (the POC or point of control is the pink line in the charts for non IRT users). Back home we call this context in some circles its apparently referred to as voodoo. Anyway…. Most of you that have been following me know that I sit out the first hour of trade most days in all the markets I trade so that I can wait for the IB (Initial Balance) to be established. The reason I do this is because I have more context to trade with once the tone for the day has been established in that first hour. I have a plan for up, down, sideways but I never know “for sure” which one is going to be the right approach on any given day. The first hour is used to observe which side is dominating and then I try to lean with them regardless of whether or not it was my top idea for the day. Some days that goes well, some days it goes extremely well, and other days I lose. Don Miller is fond of saying that trading is basically: “make a little, lose a little, make a little, make a lot”….I can’t think of a better description.
The IB markers are the yellow lines in the chart you are looking at above. As you can see on Friday the IB lows broke shortly after being established at 10:30 and served as resistance the rest of the day. Here is a series of tweets made Friday as I’m observing this happen:
So to review what these tweets mean from the top
- Last Wed. profile was a double distribution structure which simply means it has two distinct high volume areas in the days range. The lower distribution was reached very early on in the driving action down early on Friday. If buyers fail to balance at that lower distribution my first hypo has to then be for recent lows toward 1865 to be tested. The market is telling me that I have to stick a fork in my top hypo looking for that push to 1931. For Friday, that’s over. Done. Time to move on. That’s the context the market has given me to work with. As for those of you that ask questions about every word I tweet…Ratt is a band…they sang a song called Round and Round which was released in 1984. I might have listened to it on Friday. Maybe twice. Its on YouTube if you are that interested. Ratt has nothing to do with the market context for Friday.
- I also know from previous sessions that 1865 has been tested multiple times (1/27, 1/28, 2/3) so I am not viewing that as stronger support each time its being tested I’m viewing it as weaker. The market has advertised lower to buyers several times and found them there…while I don’t ever know for sure where buyers that haven’t acted yet will step in, I am more confident after this many tests that the market is likely going to have to advertise even lower still to find more or new buyers.
- With the o/n (overnight) lows being taken out early on Friday and the IB lows breaking and then serving as resistance this is an example of me stating what is obvious to anyone following the auction as it plays out. I’ve had people get annoyed with me on Twitter for stating the obvious but….if you’ve been on there for even a week you know just how hard it is for many people on the platform to even acknowledge the obvious….so you’ll have to deal with me doing this once in a while…I find it a good habit to vocalize what is going on for my own trading. In the end, Friday’s session was bearish. I don’t need to hear about 10 thousand macro inputs as a day trader to understand this. I don’t need to go searching for headlines after the close. I don’t have to double-check the correlation to crude. I don’t have to pretend it wasn’t because this week is Chinese New Year and maybe since they are off we’ll be ok Monday….the price and volume action on Friday was enough information.
Then a lot of us watched the Super Bowl…..and fast forward to this morning.
- We had a significant gap down this morning. Friday’s close was 1875 so that means we are gapping down through this 1865 area. I had already built into my assumptions Friday (see tweet above) that this was not likely to be strong support again. Today’s open confirmed that but even before then the market was serving up more context to work with. As I mentioned on the stream this morning given the size of the gap when we measure gaps this large over the last 3 years there was a very strong indication early that the gap was not going to get closed today. I did the stat disclaimer in the last post but I’d like to repeat again since I’m going to introduce more stats below: low probability isn’t ZERO, it means low probability. Here are my first tweets about ES this morning before the open:
The reason I’m looking for the 1835 is because there is a naked point of control there. It’s a previous level where both buyers and sellers were willing to transact in size. For those of you reading unfamiliar with this kind of term the “point of control” is the most commonly traded price each day in terms of total volume traded. When the POC is referred to as naked it means that it hasn’t been touched/auctioned again since the session it was formed.
Permit me go on a minor rant here for a moment. I have often seen fundamental types or people that have no understanding of the day-to-day auction say things like “The markets have no memory”. This is simply not true. People…..buyers and sellers (or those programming computers to do this work) make up the market. Of course people have memories about where they transacted. A volume point of control is often where bigger players are transacting because they are the ones that create the most volume thus creating the point of control. So tell me, reader, do you think if XYZ hedge fund is long from 1835 from 1/20/16 and price is now nearing that again that they have no memory of doing that? What if 5 hedge funds are long from that level? Personally I hold the belief that all 5 funds remember that they transacted there…especially so if they continue to hold that position.
So….this morning I’m looking at the range of the o/n action, the size of the gap down, and this naked 1835 poc and it jumps out to me as a highly probable downside continuation objective to work around as a hypo 1 today. That’s where these tweets come from and this is the same day-to-day approach for all the markets I tweet about each morning.
- Lets look at some other common things the ES does
- The o/n (overnight) lows were taken out early (the o/n highs were 1884.5). The o/n high OR the low is either touched OR exceeded in about 95-97% of all sessions in the ES. When one side breaks, the odds that the other side will break as well are reduced considerably. Today for example the o/n lows were taken out early and so I have context that there are very low odds (NOT ZERO) I’ll see the o/n highs reached today. This is not true simply because the o/n range was large either.
- When is the most common time for the high OR the low of the session to be put in for the ES? Well…the answer is the first hour. Chart here and in the interest of time I’m not doing a detailed overview of the percentages or instances. This is a 2 year trailing study for ES. Does this mean every day? Absolutely not….we’ve seen several days this year with huge reversals into the close that set a new high or low and the chart below plainly shows they occur at all hours increments of the trade day….but seeing the final High OR the final LOW established in the first hour of trade is what is most common. This may be of interest to the people on Twitter still claiming the only price that ever matters is the close!
- The high print so far came on the opening bar of the RTH which of course is within the first hour. Stats suggestive to me that it is a low probability we are going to see 1852.50 print again today before the close.
- The IB high today was 1852.5 and the low was 1833.25. The IB low was broken after it was established. I know from data that it is now uncommon (read: lower probability, NOT ZERO) for the IB high to break in the same session.
- What about the range of the ES? So we know that the High OR the Low is most often established in the first hour…but what about the range the rest of the day. When do we usually see the range expand to its limits in the ES? The answer illustrated in the chart below (also a 2 year trailing study) is in the last hour:
So I’ve watched at this point in the day the following take place: we gapped down significantly through previous support, the high of the RTH (so far) was put in during the first hour, the o/n lows break, the IB lows break….now we are headed into the close which is the most common time for the days range to expand and in this case of course if all the stats held through we’d see expansion on the downside. Now you have some color as to why I found it odd to watch intraday players since the open actively searching for a bottom to fish. What data were they using and what context? Perhaps some will share in the comments.
Now, as I wrote this post out guess what happened….yes indeed the first hour highs were exceeded and so was the IB high. That’s markets! We’ve seen several neutral days like this so far this year but so far none have had any upside staying power….perhaps this will be the one. Not common for this type of action to happen but there it went anyway. All I can do as a trader is play the odds though and that requires discipline each day.
Lets also take time to face some reality about this however since I’ve already been trolled once about how I now feel about my “surprised at all the bottom picking attempts” tweet.
First of all, being that I live in the real world, I’m of the mind that for anyone that spent the morning and into the afternoon picking a bottom this rally is nice but probably didn’t get them back in the black for the day. Even worse for the person that says they day-trade that is now grinding it out into the o/n. Yeah….I’ve been there. Even more real world is that its far more likely many lost money today fighting the downside early and often. Second, please don’t tweet me by measuring from the intraday low and then comparing the time stamp on my tweet. We traded 14 contracts at the low tick….and it wasn’t you so the insinuation is sort of ridiculous. Third, I made very clear in my post and constantly on my feed that I’m a day trader and today the primary hypo played out in full and extended before the reversal. Did I get long late today? Nope. What’s going to happen tomorrow? I have no idea. What I will do when writing plans tonight is note all the auction levels from today and previous sessions where I can gain context and I’ll develop a plan for up, down, and sideways. Tomorrow morning I’ll review the overnight session and key levels in the context of those plans and from there I will execute. Same process every single day.
Good Luck In Your Trading