[Dogpile]

meanth the title to be:

Random Comment Regarding Volume Distribution on ES (got itchy finger and posted too fast)


when you see price building at a single price and suspect the market is balancing.... wait until at LEAST 40,000 contracts trade on ES at a single price before you can expect a potential breakout.

this rule of thumb can keep you fading the moves to the std dev bands until 40k+ contracts trade. somewhere north of 40k contracts, it very often takes 43k+ --- you can stop fading and start looking for a breakout. this simple rule of thumb is just something I have noticed after staring at volume distributions for the last 3 months....

I am calling this: 'Dogpiles Random Rule #1' --- should become a mainstream classic.

seriously though, just watch and tell me if you agree. I am talking about the ES.D volume distribution --- I use tradestation.

dog

[alleyb]

The only thought I have on volume at a price before a break out occurs is that markets are dynamic and evolving with increasing volume. One day next year I fully expect ES volumes to trade 8 million in one day. Don't get stuck in eternity and also understand how volume changes at moments like option expiry, roll-over, day before/after market holidays plus the traditional so called holiday months like August or December. IE I am saying a degree of flexibility is warranted rather than pure precision.

[Dogpile]

IE I am saying a degree of flexibility is warranted rather than pure precision.

yes good point.

I meant it to be taken as a concept rather than an everlasting rule. I posted it simply because I wish someone had shared this with me a few years ago. Would have saved me a lot of money not getting chopped up.

The concept is just that you should almost EXPECT the market to play a chop-chop game after some good morning movement (with some exceptions). This choppy action is what is needed to eventually set the market up for an afternoon directional move. 40,000 was just a number I have pointed out as a starting point.

take today as an example (Wednesday):
the market played a sideways chop game for much of the day. 40k contracts did not form at a single price until 3:40pm. Thus, the play was to either fade moves away from 'value' or just wait. Not getting caught up in that chop (or playing fade-trades only before 40k) was a nice guideline to have. The market ended up printing ~55k at 1489.50 today and then had a nice directional move down for -20 pts. Waiting until at LEAST 40k saved you any chance of getting caught in the chop today. Waiting for 55k was golden on this day. Tell me when a market is ready to trend and I can just bracket it and use a stop and clean-up.

Over the last 8 weeks, the median daily PVP is 54,986 contracts. The lowest one that occured is 39,917. As market dynamics change and volume goes up over time in the futures market, 40k will prove too low and I will adjust it upward. But I am just thinking of 40k as a MINIMUM type of number anyway.

[Dogpile]

A few other things I am monitoring:

Extremely high PVP's have become important price pivots.

Multiple daily PVP's building up near each other also have meaning.

Last Wednesday, the daily PVP actually built at a price outside the 'value range' for the day. (ie, the PVP was below the Value Area Low). this PVP was also the lowest (in terms of number of contracts) in the last few months. In this situation, this was a signal of extreme weakness as the market dropped another -30 pts the next day.

I find the 'daily PVP watch' to be something that is quite useful to watch and think about. there is a ton of information there. Would love to discuss what others are seeing and what they may have picked up that I haven't yet discovered, which is surely a ton..

[alleyb]

fair enough re your comment on 40k as a tipping point in volume.
Re: ES
Take yesterday Nov 13th and look at the break down of volume at price and one can see the buying that came in seems to have been roughly 100k net with an average at 1478. Then a quick glance today Nov 14th shows roughly 50k were sold today at an average of 1476 leaving the buyer net long 50k average 1480. So what apparently happened was that the buyers became a little exuberant at todays highs and were forced into chasing their tail. No doubt you will say this is conjecture or subjective and maybe there is an element but if you look at sells vs buys and look at statiscally high levels of liquidity then you can see that yesterday there were several instances of 20k on the way up per price but that today it was a maximum of 14k at one price but most were 10k or less. There is still some selling to be done whether on weakness or on a rally

[alleyb]

as for PVPs there is nothing unusual in that. High volumes have always been the ending and starting of distributions in Stocks and Low volumes in Bonds. since 1982 and 1978 respectively. Prior PVP levels will always act as a magnet and is in fact not the area to trade at as the only advantage is for the broker. PVPs should be viewed as a get out jail card unless of course your objective is to scalp as for some it is for minimum trend returns

[mister ed]

Thats some great observation in there guys. Will have a play with this concept too and see what I can come with.

[Dogpile]

here are some comments on last 4 days. I don't mean for this to be a trading strategy in and of itself -- just a higher level concept to be aware of...

My hypothesis was that the market will generally not sustain a trend until 40,000 contracts trade at a single price. The implication of this is that you can generally think about counter-trend trading until you get to something approaching 40k contracts and then you need to start to be more careful of counter-trend trading as the market might have chopped up enough traders such that a trend could not ensue. The bigger implication is to then gear-up and try to catch the trending move that could develop and just hold on.

Be aware that this is just a tendency I have noticed. The market could trend strongly and THEN do its 40,000 after the movement --- but somehow, some way -- it will get to 40,000 on any decent volume day. I will add the caveat that it is important to figure out ways to confirm this tendency on lower-timeframe such that you do not get 'run-over' in a trend day. Personally, I like to watch how price is reacting to VWAP and to use various standard deviation types of methods to gauge whether the market seems to be acting consistently with my various trading concepts.

Let's look at last 4 days from only a high-level. Tuesday, Wednesday and Friday were very much consistent with my hypothesis - Rangey Price Behavior until 40k.

Tuesday was a trend-day but even that day first printed nearly 50k contracts at 1461.50 before the REAL trend began.

Wednesday was straightforward sideways chop with a giant plunge at the end after printing nearly 55k contracts.

Thursday came close to 40k before dropping really hard (it hit 38k). Obviously, when you see price failing just under VWAP, as it did on Thursday on that test UP, you would want to think short. A market that is rejecting VWAP (while under VWAP) is a short.

Friday was a 'wide and loose' day that saw giant swings but no sustained trend away from VWAP.

All you really have to do is catch 1 of these afternoon moves and your week is made. Or catch just a piece of a few of them and your week is made.