Everything is a series of facts surrounded by other circumstances.

Transcription

1 Following are several trade ideas based upon the concepts we employ to observe the twoway auction process. This serves as a list of various market situations and criteria to help Intensive traders distill the information involved in the process. However, it is important to state explicitly before we proceed, that all trades, and observations, must be made in context. Trade List Everything is a series of facts surrounded by other circumstances. 1. Overnight Inventory Adjustment 2. Gaps Rules: a. Go with all gaps that aren t filled relatively quickly. Go with a gap on a failed attempt to fill the gap that slows in tempo and shows declining volume. This includes gaps that fail to fill or are filled to the tick and then price is rejected. b. If the gap is filled and value cannot at least become unchanged, relative to the prior day, a later day move in the direction of the gap has higher odds of occurring. This is more easily recognized when you have internalized the concept of trading value rather than price. c. If the gap is filled, the initial destination trade becomes the high or low of the previous pit session depending if it is a downside gap or an upside gap. 3. Look Above or Below Range and Fail a. Multiple monthly, weekly, daily trading range b. Overnight range c. Prior pit session range d. 30 minute bar, multiple 30 minute bars 4. Breakout Out of Range and Accelerate a. Multiple monthly, weekly, daily trading range b. Overnight range c. Prior pit session range d. 30 minute bar, multiple 30 minute bars 1

2 5. Potential Developing Trend Day Using a Thirty Minute Bar to Fade a Single Tick Failure a. On a developing trend day lower, fade a single tick failure of the previous thirty minute bar on a retracement b. On a developing trend day higher, fade the single tick failure of the previous thirty minute bar on a pullback 6. Trending Pattern Poor Highs and Lows Printing 7. Pit Session Inventory Getting Out of Balance: Automatic Buying or Selling Off of a Major Reference Degree Line Pattern 9. Spikes 10. Profile Balance Area Breakouts and Breakout Failures Trade Descriptions 1. Overnight Inventory Adjustments Overnight inventory is measured from the pit session settle of the previous day: When the majority of trade in Asia and Europe occurs above the settle, overnight inventory is considered long. When the majority of trade occurs below the settle, it is deemed short. If overnight trade occurs relatively equally on both sides of the settle, overnight inventory is considered neutral. *Caveat We use the October 20, 2014 pit session open as an example. On this day overnight trade presented as long. A more contextual view would make the distinction that the market traded lower for the majority of the overnight session. The overnight trade was, in fact, short. Over the course of a year we approximated that 65% of the time there was a counter auction relative to overnight inventory. Note when there is no counter auction relative to overnight inventory, this is also an important consideration. An example of an overnight inventory adjustment: If overnight inventory is long, the expected reaction when the pit session opens is to see a counter auction lower to adjust at least some of this long inventory. Traders who are not considering the overnight inventory 2

3 conditions can be mislead on this initial push down into believing that the market is weak when, in fact, it was simply an overnight inventory adjustment. Of course, just the opposite is true when overnight inventory is short. When there is no adjustment to long or short overnight inventory and the market immediately moves in the direction of overnight trade, this is generally a very strong signal. 2. Gaps Gap Background A market can gap slightly higher or lower with the gap being filled almost immediately. In this instance the market simply explored outside of the previous day s range with no acceptance or follow-through. We focus more on substantial gaps, which are approximately three points or more. A gap of this magnitude generally signals: 1. An acceleration of an already existing trend 2. A breakout from an existing trading range When it is an acceleration of an existing trend it is generally trend-positive and serves as confirmation of the trend. Similarly, a breakout from a trading range, very often, signals a change in market perspective. Either situation should be afforded a great deal of attention. The larger the gap, the lower the odds that the gap will be filled on the day it is created. The dynamics for making this statement are that large gaps, very often, require immediate market responses. (Think current business first.) Margin calls and other activity cause additional forced short covering with a gap up or additional long liquidation on a gap down. 3. Look Above or Below the Overnight or Pit Session Range and Fail Perspective Overnight and pit session highs and lows are very visual day timeframe references; the example discussed later must be viewed in context. For example, it is not suggested to automatically look to fade the overnight high or low; however we want to be constantly aware of how prices respond at these levels. Failure to trade through or trade through without follow-through is, very often, an excellent day timeframe trading opportunity for the following reasons: 1. A failure at one extreme of the overnight or pit session range, very often, sees the market began to trade towards the opposite extreme. Secondly, 2. A fade at the overnight or pit session high or low generally allows you to place a very tight stop just slightly above or below the pre-identified high or low. The potential for an asymmetric opportunity exists; the risk would be small or limited 3

4 while the potential is to trade to the opposite extreme of the overnight or pit session range. 4. Breakout of Overnight or Pit Session Range and Accelerate This trade requires a trader to be quick as the move can be dynamic. Oftentimes a buy stop above or a sell stop below is used to get the trade on. Later in the session, as structure develops, breakout and breakout failure opportunities can be assessed in terms of odds by the Profile structure that has previously printed. Prominent or very prominent points of control (6-7+ prints wide), as a general rule, reduce the odds of upside continuation. Alternatively, migrating POCs in the direction of the breakout create higher odds of continuation. 5. Potential Developing Trend Day Using a Thirty Minute Bar to Fade a Single Tick Failure a. On a developing trend day lower, fade a single tick failure of the previous thirty minute bar on a rally b. On a developing trend day higher, fade a single tick failure of the previous thirty minute bar on a pullback When you see a potential trend developing to the downside you can use a look above a prior thirty minute period high to get a short trade on. Or, on a potential trend developing to the upside, you can use a look below a prior thirty minute period low to put a long trade on. 6. Trending Pattern Poor Highs and Lows Print and Then Are Revisited A nuance we observe in trending environments. It occurs when the current thirty minute bar takes out the previous bar by only a single tick, matches the previous bar, or fails by a single tick forming a poor high or low. (A secure or good high or low needs to be at least two single ticks on a thirty minute period Profile.) We believe this occurs because late buyers or sellers are waiting for an opportunity to attach themselves to the existing trend. The high or low of the previous bar is a very visual and identifiable reference for these traders to attempt to get on. These traders, often referred to as momentum traders, tend to enter the market in the direction of the trend. As the market retraces, after printing the poor high or low, a trade is initiated on a pullback with a poor high or, on a bounce with a poor low. Exit would be considered once the poor high or low is revisited or repaired. Obviously the exit, like all parts of a trade, requires context, trading style, trading timeframe, experience, and other factors. 4

5 Note on This Trade Regarding Auction Completion Particularly on trend days or high confidence days, you will observe that very seldom do we have a lasting poor high or low. Opportunities to trade with the day timeframe trend on these days very often occur when a market leaves a poor, uncompleted, or unsecured high or low and pulls back. Generally, the pullback is temporary allowing short-term inventory to come into balance. Once the short term adjustment is completed the auction continues directionally. 7. Pit Session Inventory Getting Out of Balance: Automatic Buying or Selling Off of a Major Reference Degree Line Pattern Traders are getting short in the hole on the downside or long in the tooth on the upside. A retracement back to the very prominent POC may come into play during current session or we carry this structural observation forward for the next session recording that short-term inventory may be getting too long (or too short). 9. Spikes Use this structure as a reference for the next trading day. Is this late day price probe rejected or accepted? Spikes provide more fine-tuned, day timeframe references that act as a fulcrum to gauge the next pit session s auction. 10. Profile Balance Area Breakouts and Breakout Failures When there is a very prominent POC, fade a breakout on the range extremes due to the higher odds of coming back to the POC. The POC often acts as a magnet. This pattern is traded similarly to trades #3 Look Above and Fail and #4 Breakout and Accelerate. Excess and Balance are the Two Most Important Concepts that We Deal with Balance A breakout from balance represents the beginning of a new auction; that breakout can be relative to several months, weeks, days, or in the following example, from day timeframe balance using thirty minute bars. Day timeframe balance generally is seen via an inside bar or two or more overlapping thirty minute bars. These breakouts from balance, very often, are also asymmetric opportunities. They are asymmetric because as you will see in the later example, stops can be placed very tightly while the potential from the breakout can exceed the risk multiple times. Excess Excess marks the end of one auction and the beginning of a new one. Excess, like all observations, needs to be understood in context. Excess at a major reference a weekly bracket low or a multiple day range high indicates a major change in thinking. 5

6 Excess on a thirty minute Profile period suggests a change in auction in the short-term or day timeframe auction. On a day timeframe basis the single prints between two distributions would be considered excess. Gaps are also a form of excess. You can envision gaps as single prints. Any time excess is removed or taken out the potential for change has risen sharply. Lack of Excess The Profile would indicate this through poor highs and lows. A monthly, weekly, or daily bar with similar highs or lows would also be considered a lack of excess. Lack of excess is one of the most complex concepts we deal with. Initially, a lack of excess indicates a lack of auction completion. The expectation is that following a short-term inventory adjustment the market will, once again, auction through the non-excess high or low continuing the auction process. A lack of excess usually occurs when short-term inventory has gotten too long or too short; a liquidating break from a poor or non excess high or, short covering rally away from a poor or non excess low is likely to follow. Lack of excess usually occurs when the market is very slow and grinding. Additionally, poor highs and lows mostly occur around day or short-term visual references. Any time excess is removed or taken out the potential for change has risen sharply. Trade examples follow. 6

7 1. E-Mini S&P September 29, 2014; Overnight Inventory Adjustment Reference: In this example, as a guide, the overnight low and the 2-day balance low were used to monitor for failure or acceptance. The market confidence was low and the adjustment of overnight inventory took time to develop. It was not until after the first thirty minutes of pit trade before traders figured out that the market wasn't going to continue lower in the direction of overnight trade. The shorts were in trouble; the rout was on. Overnight inventory was very short on this day having a 24 point range. The counter auction in the next pit session was equally dramatic. This is a classic trade that we watch for. Not just for the trade itself but also for gaining a perspective for the developing session. Beyond the trade, during an overnight inventory adjustment we ask, is the move for real or merely an adjustment of overnight inventory? On this day, the P formation suggested short covering with no new money buying; however the day timeframe trend provided an excellent trade opportunity. There was marginal upside follow through in the next pit session; however this September 30 pit high was the daily swing high before the market broke to the 1813 low. *This trade was also a #3 Look Below the Overnight Low and Fail. The auction then proceeded to trade back through and above the prior pit session low and make an assault on the other end of range. 7

8 1a. Overnight Inventory Caveat: E-Mini S&P October 17 20, 2014 Considering the Trend of Overnight Trade in Context A Nuance: The conventional way that we measure overnight inventory is from the settle. In this example with a snapshot view, measuring overnight inventory from the settle would make it appear that overnight inventory was net long. A more contextual view would make the distinction that the market traded lower for the majority of the overnight session. During this particular Fall Intensive pre-opening session, Jim explained that for this open he was designating overnight inventory as short. Everything is a series of facts surrounded by other circumstances. 8

9 October 19-20, 2014: E-Mini S&P Overnight Trade Split Out in Thirty Minute Periods 9

10 October 17-20, 2014: E-Mini S&P: Final Outcome 10

11 2. E-Mini S&P October 3, 2014: Gap Failure to Fill the Gap 1. Go with all gaps that are not filled relatively quickly. 2. Go with the gap on a failed attempt to fill the gap that slows in tempo and volume dries up. 3. If the gap is filled and value cannot at least become unchanged relative to the prior day, odds are higher that a late day move in the direction of the gap will occur. Trade Recap: Friday, October 3, 2014: 1. Set up and Entry Market trades one tick above the open and proceeds lower with an attempt to fill the gap. Price comes one tick shy at ; volume is 55 contracts on the low. Rejection. Go long, stop is back inside prior pit range. In this example, stop is below the K period single prints. Stop is based on personal preference and trading style. 2. However, you can exit at your own discretion prior to this if volume picks up and price accelerates. 3. Exit Potential at single prints from October 1 11

12 3. Look Above Range and Fail: E-Mini S&P October 6, 2014 Look Above Overnight Range and Fail 1. This trade is relevant with overnight high/lows and pit highs/lows. 2. First time: Market looks above overnight high and fails. Get short at overnight high or one or two ticks inside overnight range. Stop should be few ticks above early pit high. 3. Exit: Other side of overnight range However, you may also monitor for continuation once this trade reenters prior pit session range and trade this to the other side of the pit range. *Important Note the confidence on this particular day was very low. All trades must be taken in context. With day timeframe prior highs and lows it is not uncommon for the first look above or below to be part of a game to trigger stops; if there is a second look it is more likely for real. 12

13 4. Breakout of Range and Accelerate: E-Mini S&P October 8, Balancing day. 2. POC is migrating higher. 3. Entry: Market breaks above balance area high. Stop is placed two, three, or four ticks back inside balance area. Ultimately, stop is based on personal preference and trading style. 4. Exit: Monitor for continuation. In this instance market was tremendously short. The short covering rally was sparked by the FOMC minutes release; however, structure and shortterm inventory conditions were pointing to a move. 13

14 5. Potential Developing Trend Day Using a Thirty Minute Bar to Fade a Single Tick Failure: October 9, 2014 E-Mini S&P October 9, 2014 Early Session Auction 1. Upward spike on prior day. Short-term inventory is long. 2. During the early pit session, market begins to one timeframe lower. 3. Entry: During the current thirty minute period, the auction looks one tick above the prior thirty minute period. Sell with a stop three or four ticks above high of C (in this example) period. Stop is based on personal preference and trading style. 4. Exit: Monitor for continuation. 14

15 6. Trending Pattern Poor Highs and Lows Printing: E-Mini S&P October 8, Market is in an uptrend. 2. Market prints a poor high and retraces lower no follow through. 3. Entry: Go long with stop 3-4 ticks lower. 4. Exit: After move up, volume dries up, tempo slows. Or, take off partial and leave a runner. Exit is based on personal preference and trading style. 15

16 6a. Trending Pattern Poor Highs and Lows Printing E-Mini S&P October 8, 2014: Same Trade Happens Again in Next Period 1. Entry: Poor high prints (again). Get long with stop three to four ticks lower. 2. Exit: After poor high is repaired, if tempo slows, volume fades off you can take the trade off or leave on a portion. Personal preference. 16

17 7. Pit Session Inventory Getting Out of Balance: Automatic Selling Off of a Major Reference: E-Mini S&P October 10, 2014 The Process of a Market Getting Too Short *This happens on the long side as well as market participants buy at a visual reference. 1. Market breaks through major reference at 1918 level. 2. Traders continue to sell this reference at Downside follow through on each successive sell is waning. Traders are getting less and less for their shorts. 4. Go long at a break above the pre-identified reference at Exit is discretionary. However, you do not want to overstay since this trade was recognition of day timeframe inventory condition and the short covering move that often follows. 6. Once the short covering was over, the market came back through the 1918 level and made a pit low at classic short covering. 17

18 11. The 45 Degree Line Pattern: E-Mini S&P September 25, 2014 The Process: After a non linear break early in the session, the market balances and widens out with several attempts to go lower. Notice how the auction continually revisits higher prices before making another attempt at the lows, creating a very prominent POC that does not migrate lower. Traders are getting short in the hole as evidenced by the classic 45 degree line pattern in the Profile. These patterns are often not revisited until the next pit session as a tone for the current day is already established. If the short covering rally doesn t occur during the current pit session, carry this information forward in your preparation for the next pit session. Inset: Forming the 45 Degree Line 18

19 Degree Line Continued The Next Session: September 26, 2014: 45 Degree Line The Short Trap The failure at the lows did not occur until the fifth period in the following session. It wasn t until the tenth thirty minute period that the short covering rally got underway; a considerable amount of time passed before the shorts (and aggressive traders taking the other side) realized they were trapped. Patience Attempting to lean into the 45 degree line pattern could have caused a trader to get whipped during the morning of the next session. Had a trader solely observed the September 26 session one could have thought rotational day prominent POC. However, recognizing the shortterm inventory form the prior day would have added perspective and helped a trader to appreciate the inventory condition of his competitors. Possible Entries: 1. Failure at unchanged during the E period low. 2. Breakout above early morning B period high. 19

20 45 Degree Line Continued Final Profiles with the Following Day: E-Mini S&P September 25 29, 2014 No New Money Buying As you can see, although the short covering rally engulfed a range of 20 points after the 45 degree line pattern, there was no follow through once the short covering rally was over. The daily bar above adds context to this volatility in the short-term and day timeframe Profiles. 20

21 9. Spikes: E-Mini S&P October 10, 2014 Spikes occur late in the day with a price probe higher or lower that cannot be confirmed during the current pit session. The closing bell sounds and the game is delayed. Oftentimes, the spike base and spike extreme can be used as very short-term references for the next day s trading. The Spike Rules: Downward Spike (Opposite for Upward Spike) 1. Opening and remaining below the spike extreme would be the most aggressive response and indicate that the price probe has not gone low enough. 2. Trading and remaining within the spike indicates that the downside price probe has been accepted. Spike extreme and base of spike act as support and resistance. On this day the market continued trading lower, to create a spike in the October 13 pit session. Please see the daily bar on the next page. 3. The most positive response would be to open below or open within the spike and quickly trade above the spike base with easy acceptance back above the spike base a rejection of the downward price probe. 21

22 Other Trade Considerations: To revisit context: 1. Value As s a general rule, trade with it. 2. Trend You should have the different timeframe trends recorded as part of your preparation and trade accordingly. 22