Processing Market Information: Segment by Segment

[Soultrader]

A good way to determine market direction is to divide the trading session into multiple segments. In his book Mind Over Markets, Dalton stated that one of the most important questions a trader can ask himself is "What is the market trying to do now?"

Market internal tools are helpful in determining the overall health of the market. However, there are times when internals are out of sync with price and amongst each other. The only reliable information is price.

This study consists of 4 segments of a 233 tick chart of the YM on Feb. 9, 2007. I have divided the chart up into 4 parts to explain market information in pieces. The two red horizontal lines represent the value high and value low pivot.

Let's take a look at segment 1.



Segment 1 shows the opening hour from 9:30am to 10:30am EST. The YM takes off to rally 25 points at the open and goes to test the psychological level of 12700. The first attempt fails to break the critical 12700.. notice the 2-3 tick violation of the 00 level and back down. The market then pulls back to rally for the second attempt to test the highs of 12700. Notice how it comes up short and fails to test the initial high. This is indicated by the second arrow. This is a clear warning signal as price makes a lower high and lower low.

Now let's take a look at segment 2. Although price is still accepted above value, segment 1 produced a warning signal for bulls.



In segment 2, we see a third and fourth rally attempt to test the highs. Both attempts fail to reach the initial high and forms a double top. This is the 2nd and 3rd warning signal that price can not move upwards towards the 12700 level.

Let's take a look at segment 3.



Segment 3 shows price break of value low pivot and a move into value. Price breaks into value and then retraces back to the value high pivot indicated by the yellow arrow. When there is price rejection above/below value and a push back into it, there is a high chance it will go on to test the other value pivot. So in this case, since price broke into value there is a good chance price will test the value low pivot. Segment 3 shows this as price tries to find support at VAL.

Let's take a look at Segment 4.



Segment 4 shows the breakdown of value low pivot and then a nice declining downtrend. We clearly saw the warning signals from Segment 1 & 2. Segment 3 was a confirmation of the warning signals produced from Segment 1 & 2. The YM eventually finds support. Where? Smack at the VPOC produced from January 31st, 2007. Interesting stuff?



A trader who was able to process this information from Segment 1 and 2 could of easily grabbed a nice short when price fell into value and retraced back to value high pivot. Market profile traders would probably suggest that since the TPO could not take over the previous TPO's this was bearish. But this can clearly be seen just by looking at price action.

Now let's take a look at the overall chart.

[notouch]

Excellent analysis. It looks impressive the way price seemed to go through the VAH and then retest it before moving down but the VAH was at 12674 while the previous day's close was at 12672. Having broken through that confluence zone it tested the previous day's close before collapsing.

There seems to be a trend over the past few weeks for price to rally after a fall from about 1430 EST time into the close. Calling the bottom was difficult today though but would have been easier if I'd known about that VPOC.

Are those volume histograms or price histograms you have on the chart? It seems to me that you can get more information from looking at candlesticks with a volume histogram on top than you can with TPOs.

[TinGull]

Very nice stuff. Gotta love the vpoc's As for what notouch said about testing PDL before heading down more...ER did the same thing. And ER stopped a little below 807 before reversing and heading higher. That 807 zone held as resistance for many many weeks in late 2006 early 2007. Seeing that pullback that we saw across the board today was very nice, and gives a good launching pad for further upward movement.

Nice stuff, Soul!

[walterw]

Nice clear understanding of the market dynamics... no mistery, this happens over and over again.... its more about mastering this skill of understanding whats going on.... Soul: did you try the Volume delta cumulative ? I think it would show clear divergences on does failing Highs on segment 1 and 2... cheers Walter