The Market Profile value areas and ShadowTrader Pivots for /ESZ8 and /NQZ8 Futures are posted free every morning
in the ShadowTrader Swing Trader newsletter.
Good Morning
Lots to talk about on this post FOMC morning so let’s get at it and start with an annotated market profileA way of reading the market that recognizes either time spent or volume traded at a particular price level. A market profile can be either made up of “TPO’s” (time price opportunities), or volume. TPO’s measure how much time was spent at a particular price, while volume-based market profiles measure how much volume traded at a particular price. Generally, market profile is used in the trading of futures, especially the /ES. ShadowTrader utilizes volume based profiles. graphic.
WWW.WINDOTRADER.COM/SHADOWTRADER
I’ve marked off what I believe are the two most important things to focus on coming into today’s session. Let’s start at the top with the blue box. Price plus time equals value. That is the equation that forms the core of market profileA way of reading the market that recognizes either time spent or volume traded at a particular price level. A market profile can be either made up of “TPO’s” (time price opportunities), or volume. TPO’s measure how much time was spent at a particular price, while volume-based market profiles measure how much volume traded at a particular price. Generally, market profile is used in the trading of futures, especially the /ES. ShadowTrader utilizes volume based profiles. theory. Everything expands outward from that center. While the value areas of Monday and Tuesday are smaller, note that I drew the blue box to encompass the section of Wednesday where the most time was spent. The parts of yesterday’s distribution that are outside of the blue box are not value as they are spiky and prices there were short lived.
We can think of the boxed area as balance. Given that the market didn’t really move until the last half hour of the day yesterday, we now have a breakout to the downside of a three day balance. Again, giving yesterday until 3:30pm EST a full day. With this data we already have a lot of information about what prices might do today and how to act.
Late in the session yesterday, Jerome Powell decided that it was time for his “irrational exuberance moment” and said verbatim, “Some asset prices are in the upper reach of their historic ranges.” Of course those are not words the market wants to hear from a Fed chairman and S&P futures tumbled hard. While the average person will only think of market dynamics in the context of external factors, regular readers of this blog will point to the fact that the early FOMC action broke prices out of a two day range which then came back into range, creating a look above and fail setup which by definition always targets the opposite end of the range. Futures did exactly that and even ran a bit further because they had to tag the VPOCVirgin Point of Control. This is a point of control level that has not yet been tested (traded through) during an RTH session. If the POC gets tested during an overnight session, it does not count and remains "virgin" until it happens during a day session. that was down at 2914.75. For what it’s worth, I texted my Weekly Options Advisory clients a double SPY back spread which cost 6 cents at 1:45pm and exploded to over 80 cents at the end of the day. An interesting, esoteric, and educational play.
Which brings us to the lower boxed off area which is yesterday’s spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range.. A spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. is when you have single printsAny section of the market profile distribution that is only one TPO wide. Single prints are a sign of emotional buying or selling as very little time was spent at those levels and thus there is no value there. The endpoints of single print sections are considered to be potential support or resistance points. that happen in the last 30 minutes of trade. When that happens spike rulesA framework for analyzing a spike on the next trading day after it is formed.
Because the spike forms late in the day, it is impossible to gauge whether or not the higher or lower prices that have run quickly away from value will be deemed fair later. Thus we employ the spike rules in the next session.
Everything below is assuming a spike at the TOP of a daily range (reverse for a spike at the BOTTOM of a range)
-If prices open above the spike, that is considered bullish and tells us that prices didn't auction high enough in the spike to attract sellers and cut off buying activity. Monitor to see if there is acceptance above the spike.
-Prices opening within the spike confirm the higher prices of the spike. This tells us that the prices are fair enough for two sided... are in play. Spike rulesA framework for analyzing a spike on the next trading day after it is formed.
Because the spike forms late in the day, it is impossible to gauge whether or not the higher or lower prices that have run quickly away from value will be deemed fair later. Thus we employ the spike rules in the next session.
Everything below is assuming a spike at the TOP of a daily range (reverse for a spike at the BOTTOM of a range)
-If prices open above the spike, that is considered bullish and tells us that prices didn't auction high enough in the spike to attract sellers and cut off buying activity. Monitor to see if there is acceptance above the spike.
-Prices opening within the spike confirm the higher prices of the spike. This tells us that the prices are fair enough for two sided... you say? And I was just getting to understand gap rulesGuidelines to follow on any day that the futures open outside of the prior day's RTH range. Only opening outside of range is a true gap and puts gap rules in play. 1. Go with all gaps that don't fill right away. This means that if early trade doesn't start to correct the imbalance, then prices will probably move in the direction of the gap. 2. Larger gaps can often fail to fill on the first day or may fill only partially. 3. If the gap fills (meaning the prior day's RTH high is touched on a gap up or the prior day's RTH low is touched on a gap down) and value cannot get to at least overlapping, then the odds of a late day rally (on a gap up) or late day selloff (on a gap down) increase. 4. Gaps of larger than $20 in the /ES are difficult to trade and should be avoided early in the day as t... More, now there are spike rulesA framework for analyzing a spike on the next trading day after it is formed.
Because the spike forms late in the day, it is impossible to gauge whether or not the higher or lower prices that have run quickly away from value will be deemed fair later. Thus we employ the spike rules in the next session.
Everything below is assuming a spike at the TOP of a daily range (reverse for a spike at the BOTTOM of a range)
-If prices open above the spike, that is considered bullish and tells us that prices didn't auction high enough in the spike to attract sellers and cut off buying activity. Monitor to see if there is acceptance above the spike.
-Prices opening within the spike confirm the higher prices of the spike. This tells us that the prices are fair enough for two sided... too? When will it end?
The reason we have spike rulesA framework for analyzing a spike on the next trading day after it is formed.
Because the spike forms late in the day, it is impossible to gauge whether or not the higher or lower prices that have run quickly away from value will be deemed fair later. Thus we employ the spike rules in the next session.
Everything below is assuming a spike at the TOP of a daily range (reverse for a spike at the BOTTOM of a range)
-If prices open above the spike, that is considered bullish and tells us that prices didn't auction high enough in the spike to attract sellers and cut off buying activity. Monitor to see if there is acceptance above the spike.
-Prices opening within the spike confirm the higher prices of the spike. This tells us that the prices are fair enough for two sided... is because after the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. is formed, the market closes so we don’t have any further market generated information until the next day. To be more precise, we don’t know at the end of the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. being formed whether or not the lower prices are being accepted or rejected. Thus the next day we employ the spike rulesA framework for analyzing a spike on the next trading day after it is formed.
Because the spike forms late in the day, it is impossible to gauge whether or not the higher or lower prices that have run quickly away from value will be deemed fair later. Thus we employ the spike rules in the next session.
Everything below is assuming a spike at the TOP of a daily range (reverse for a spike at the BOTTOM of a range)
-If prices open above the spike, that is considered bullish and tells us that prices didn't auction high enough in the spike to attract sellers and cut off buying activity. Monitor to see if there is acceptance above the spike.
-Prices opening within the spike confirm the higher prices of the spike. This tells us that the prices are fair enough for two sided....
SPIKE RULESA framework for analyzing a spike on the next trading day after it is formed.
Because the spike forms late in the day, it is impossible to gauge whether or not the higher or lower prices that have run quickly away from value will be deemed fair later. Thus we employ the spike rules in the next session.
Everything below is assuming a spike at the TOP of a daily range (reverse for a spike at the BOTTOM of a range)
-If prices open above the spike, that is considered bullish and tells us that prices didn't auction high enough in the spike to attract sellers and cut off buying activity. Monitor to see if there is acceptance above the spike.
-Prices opening within the spike confirm the higher prices of the spike. This tells us that the prices are fair enough for two sided...:
-Acceptance within the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. confirms the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. and in today’s case would be bearish.
-Moving up out of the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. quickly is bullish because it negates the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. as there is little acceptanceWhen the market profile begins to build out or develop in a certain area, it is said that the market is accepting those prices. This can be measured either in time spent or amount of volume that is transacted. It is generally understood that ShadowTrader defines acceptance as more of a time dynamic than a volume one. A good rule of thumb is to look for at least two TPO periods to print in the accepted area. The acceptance confirms that a significant amount of market participants are transacting at those levels. Acceptance is the opposite of rejection. More at the new lower prices.
-Moving lower below the low of the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. tells us that prices have not yet auctioned low enough to attract any buyers and is the most bearish scenario of the three.
Which brings us to the overnight action. At first glance it would appear that the overnight action is accepting the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. as all of it is within it. That’s a decent read but remember the overnight is not what matters. Similar to a gap being filled or a VPOCVirgin Point of Control. This is a point of control level that has not yet been tested (traded through) during an RTH session. If the POC gets tested during an overnight session, it does not count and remains "virgin" until it happens during a day session. being taken out, only what happens in the RTHRegular Trading Hours. In the /ES this means the price action from 9:30am EST to 4:15pm EST only. session counts as satisfying a rule. That being said, overnight activity thus far is very balanced and certainly within the meat of the spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range.. Although there is a gap of +4.75 currently, gap rulesGuidelines to follow on any day that the futures open outside of the prior day's RTH range. Only opening outside of range is a true gap and puts gap rules in play. 1. Go with all gaps that don't fill right away. This means that if early trade doesn't start to correct the imbalance, then prices will probably move in the direction of the gap. 2. Larger gaps can often fail to fill on the first day or may fill only partially. 3. If the gap fills (meaning the prior day's RTH high is touched on a gap up or the prior day's RTH low is touched on a gap down) and value cannot get to at least overlapping, then the odds of a late day rally (on a gap up) or late day selloff (on a gap down) increase. 4. Gaps of larger than $20 in the /ES are difficult to trade and should be avoided early in the day as t... More are not in play as we will open well within yesterday’s range.
How to play today, what could happen, how the heck do I make money with all this crap?
-The ONLOvernight Low. A term mostly used for the futures market as it trades almost around the clock. To be precise, in the /ES this would be the lowest price between 4:30pm EST and 9:30am EST the next day. double bottomed right at the RTHRegular Trading Hours. In the /ES this means the price action from 9:30am EST to 4:15pm EST only. low and has rallied pretty strongly since then. That has me thinking short covering is happening and I would be long biased early on any pullback that fails to retest that ONLOvernight Low. A term mostly used for the futures market as it trades almost around the clock. To be precise, in the /ES this would be the lowest price between 4:30pm EST and 9:30am EST the next day..
-2917.75 is very key as it is the low of the aforementioned 3 day balance. Thus far, overnight trade has not moved up into that area. If it does early today that is probably a short on the first test which could turn in to a nice downside move OR if it rejects gently and only pulls in a little, then that’s a buy for the deeper move back up into range. I believe today’s trade will be dominated by whether or not we find acceptanceWhen the market profile begins to build out or develop in a certain area, it is said that the market is accepting those prices. This can be measured either in time spent or amount of volume that is transacted. It is generally understood that ShadowTrader defines acceptance as more of a time dynamic than a volume one. A good rule of thumb is to look for at least two TPO periods to print in the accepted area. The acceptance confirms that a significant amount of market participants are transacting at those levels. Acceptance is the opposite of rejection. More or not above this very key level.
-FOMC moves are often kneejerk and reek of “short term-ism” (If that actually smells like something, I’m thinking it would be Doritos, cheap beer, and an old shag carpet). These moves are often reversed fully the next day. While that’s certainly not any sort of absolute, it’s good to keep in mind. We know already that the move created a long row of single printsAny section of the market profile distribution that is only one TPO wide. Single prints are a sign of emotional buying or selling as very little time was spent at those levels and thus there is no value there. The endpoints of single print sections are considered to be potential support or resistance points. which by definition have little resistance on the way up. Because they happened late in the day, we call them a spikeA set of single prints that are created in the last 30 minute session of the day which form at the top or bottom of a range. and use the framework of the rules as our guide.
ShadowTrader Weekly Options Advisory
-Real time text messages on all entries, exits, and adjustments
-Private, members-only webinars every Thursday
-Includes 2-3 "What's Peter Thinking" recorded audio updates daily!
$49 per monthHave a nice day,
peter
