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

[ant]

In this post http://www.traderslaboratory.com/for...html#post18091, I commented:

Originally Posted by ant On 8/31, the ES was balanced again and put in higher value. Although it stopped at the upper extreme of the balance area at 1484.75, we could see a break out of that balance area and a play for 1510.50. I haven't done my analysis for 9/4, but this is probably what I would be looking for. With a symmetric, balanced day like 8/31, one should trade with the directional move away from balance (up or down).

Well today, the ES broke out of the balance area and traded to a high 1499.25. Although I had a target of 1510.50, I didn't expect it to get there in one day. Frankly, I didn't expect it to get to 1499 either. However, there were clues early in the day that should have kept a trader on the right side (long side) of the market today. For example,

• The ES opened around the previous day's VAL and auctioned up from the opening bell. Trading above the VAH on healthy volume provided confirmation for existing longs and the possibility of a directional move away from balance. The ES then traded above the upper bracket limit, again on good volume, where price was accepted.
• The ES was "one timeframing" for most of the day as it was a trend day up, whose daily Market Profile appeared elongated all day long. While a market is "one timeframing," it is usually wise to not try to fade the market. If you don't want to go with the directional move, then at least stand aside.
• The shape of the Market Profile graphic for 8/31 was fairly symmetrical and balanced. See chart below. Again, this points to the potential (not guarantee - we could continue to balance) that a directional move could develop. The ES was also trading near the upper bracket limit.

ES-MP.GIF

See the chart below for an illustration of today's elongated Market Profile graphic (chart 1), 5-min chart of today's price action (chart 2), and the balance area the ES broke out of (chart 3).

ES1.GIF

Although we traded above the balance area today, which should be considered bullish, there are areas of concern for the bulls, IMO. Since 8/16, the ES has been trading up but on the lightest volume of the year. See the chart below which shows the volume for all NYSE issues.

ES2.GIF

Secondly, the composite Market Profile from 8/16 to 9/4 has formed a P-shape, which indicates short covering. This doesn't mean that the market has to turn on a dime though. See the chart below.

ES3.GIF

In my opinion, trading the long side of the ES is becoming increasingly risky, and I think I will probably be treading softly on the long side in the ES. I wouldn't be surprised if today was a false breakout. Today, the ES closed about 10 points off its daily high which is a sign of profit taking, I think. But will the long liquidation be joined by new selling? I don't know yet. Overnight trading might provide some clues tomorrow morning. I will definitely be looking for weakness on any attempt to rally tomorrow. My guess (which I wouldn't use to trade off because it is a prediction), is that we probably won't see the ES trade above 1510.50, if it even gets there.

What do you think? Am I way off base here? Look forward to your comments.

[Dogpile]

agree ant...

'day timeframe trend day up' but profile shape was 'P' -- generally means some long-term selling and is early warning sign that market might be struggling to auction up.

though not identical -- might be similar to Daltons example on pages 120-122 (Day 6 in 'Markets In Profile')...

despite the late move down, we closed above VWAP and built higher value. there has been no sustained selling below VWAP in 4 days now. as a Taylor disciple -- I will be looking for a 'high to low' day tomorrow -- but trying not to be too biased and just take the set-ups as they come of course...

btw, in MIP -- the day after day 6 was a balancing day that built higher value -- then a trend day down --- that would be ok with me...

[ant]

Originally Posted by Dogpile btw, in MIP -- the day after day 6 was a balancing day that built higher value -- then a trend day down --- that would be ok with me...

I like that comparison. Perhaps we will have a balancing (contraction) day tomorrow (with a high near 1510.50) since we had a trend day (expansion) today. I too will take a trend day down the following day in the direction of the intermediate-term trend. The chart below provides a reference to day 6 that Dogpile referred to.

ES.GIF

[Dogpile]

especially juicy is the fact that both patterns (June 2006 and now) are also 'A-B-C up' patterns on daily timeframe...

[darthtrader]

cool stuff, i've been trying to plug away at Dalton a little bit at a time and its finally starting to make sense(or at least less like trying to read egyptian). ant, what do you mean by "one timeframing" though? The next TPO isn't crossing over the previous much?
Do you guys find the whole lettering view to be useless? Just focus on the way the profile is developing overall?

[ant]

Originally Posted by darthtrader cool stuff, i've been trying to plug away at Dalton a little bit at a time and its finally starting to make sense(or at least less like trying to read egyptian). ant, what do you mean by "one timeframing" though? The next TPO isn't crossing over the previous much? Do you guys find the whole lettering view to be useless? Just focus on the way the profile is developing overall?

"One timeframing" is when there is only a single longer timeframe trader in the market (buyers or sellers). When buyers are in control, the current bar does not violate the previous bar's low by more than a tick (vice versa for sellers). The lettering is useful for understanding what happened in a specific 30 min time period. Without the lettering, you wouldn't know what happened earlier or later in the day by looking at the profile. That's all.

Use the Market Profile graphic as a tool to understand market behavior. Forget about trying to identify setups using Market Profile, first try to learn to read the market through the Market Profile. For example, look at the shape (e.g., symmetric or squat means balancing, elongated means trending, p-shape means short covering, b-shape means long liquidation, etc). Pay attention to tails, single prints, range extension, gaps (invisible tail), value areas, high/low volume areas, spikes, etc. and learn to interpret what each of these components is telling you about the market auction. Learn to identify the attempted direction and then gauge it's performance in moving in that direction. You can use volume analysis when the attempted direction is clear and use the profile shape when the attempted direction is not so clear. Also, look at value area placement. Again, the goal is to try to understand what is happening in the market so that you can position yourself with order flow. Once you have market understanding, then you can look for asymmetric trade opportunities (i.e., trades that have a chance of 50% or more of winning and have a win/loss ratio of 2 to 1 or more). One of the basic trades in Market Profile is to identify brackets and balance areas and then fade the extremes or play the breakout. But first, you need to understand context. Finally, learn about the four stages of market development as described by Steidlmayer (i.e., balance, transition to trend, trend, trend end - back to balance). Market Profile really is a great tool for understand market behavior. Hope this helps.

[darthtrader]

Hey Ant, fantastic response. You just raised a million questions in my head but I saved your response to my drive, I'll get back to you in a few months.
In Dalton MOM terms, literally today I just learned how to read sheet music as opposed to randomly hitting keys on a piano. Your talking about really playing here.
For some reason when I opened your second chart it did not display the lettered profile intially. I completely get the TPO concept after today, when I didn't see that on the chart I thought what I had just learned today was a waste.
Mentioning Steidlmayer though...
How would you go about learning MP if you had to start again? I figured i would try to understand MOM, then Markets in Profile then maybe get Steidlmayer for fun.
The opening range stuff in Mind Over Markets is basically what just clicked for me today, then everything previous clicked and I could see how things will probly progress now. What would be the most effecient path from here in your opinion book wise?

[darthtrader]

Also, out of curiosity, have you guys ever messed around with different TPO than 30 minutes?
The first time I ran across pivots was in The Logical Trader by Mark Fisher(in a round about way led me to this board). I was browsing it again tonight and he mentions he believes time is even more important than price. If the market didn't have the velocity time wise to move in the direction and in the time frame you expected, get out, move on.
If that is true though then 30 minutes seems arbitrary MP wise.
What do you guys think about experimenting with optimal/variable TPO length according to market volatility/velocity MP wise?

[steve46]

I really enjoyed "Mind Over Markets". Inspired me to write Dalton a note. Unfortunately I did not receive the courtesy of a reply

Anyway, although I do monitor MP charts periodically, I find that monitoring intraday volume also works well. Specifically, I use a method I read about in Brett Steenbarger's blog "Traderfeed". What he (Brett) suggested was to lookback 20 days, averaging intraday volume on a 15 minute basis. What you would do is to compare what you see to this 20 day average to determine whether institutions are playing that day or standing on the sidelines. Here is a link for those interested

http://traderfeed.blogspot.com/2007/...ck-market.html

For what its worth, I lookback 20 days and break out the average volume in five (5) minute increments. I have found a couple of interesting things using this method. One thing that becomes apparent is that the market "breathes" volume. That is to say, volume seems to drop significantly just prior to what I charaterize as an "impulse" move. It drops somewhat, then picks up as price develops momentum. As a move loses momentum, you can see volume expand and then fall off. Typically, these changes correspond to increases or decreases in the size of the bar or candle.

As regards today's move, I believe it took place on slightly low volume (daily basis) so I am suspect that institutions are selling it, and/or using the opportunity to modify positions. For instance, I took profits on several existing positions for tax reasons.

Good luck in the markets
Steve

[ant]

Originally Posted by steve46 Anyway, although I do monitor MP charts periodically, I find that monitoring intraday volume also works well. Specifically, I use a method I read about in Brett Steenbarger's blog "Traderfeed". What he (Brett) suggested was to lookback 20 days, averaging intraday volume on a 15 minute basis. What you would do is to compare what you see to this 20 day average to determine whether institutions are playing that day or standing on the sidelines. Here is a link for those interested http://traderfeed.blogspot.com/2007/...ck-market.html For what its worth, I lookback 20 days and break out the average volume in five (5) minute increments.

That's a good suggestion. In fact, I wrote an indicator to do just that. Check out the chart below. The yellow dot by each volume bar indicates the average volume for that 5-min time period looking back 20 days.

AvgVolume.GIF

Originally Posted by steve46 As regards today's move, I believe it took place on slightly low volume (daily basis) so I am suspect that institutions are selling it, and/or using the opportunity to modify positions. For instance, I took profits on several existing positions for tax reasons.

That's a good point Steve. Thanks for sharing.