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

[ant]

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.

ES1.GIF

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.

ES2.GIF

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.

ES3.GIF

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.

ES4.GIF

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]

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]

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]

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

http://bp3.blogger.com/_5h-SWVGx6Ms/...and+9-7-07.png

[Blu-Ray]

I still can't seem to open the first attachment

[Dogpile]

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/...and+9-7-07.png

[ant]

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]

	Quote:	Blu-Ray
	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]

<<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]

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.

ES1.GIF

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.

ES2.GIF

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.

ES3.GIF

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.