Tuesday, August 19, 2008

Open Oppurtunity & Delta Divergence

Heres todays profile and right off the bat you see the difference in todays open versus yesterday. S&P 500 opened outside of yesterdays range and went to test the value area. It got to overnight Value area low (VAL). Two important things, it could not get to settlement, and it could not test Day session VAL. A nice trade strategy is a short as it falls through open price. C period presented a nice oppurtunity to short at the confluence of both the open and the VWAP. There was another short at vwap in the G period which was a stop @ entry. I period presented another great oppurtunity to short the open.

Lets look at the open closely. I don't generally enter the cross of the open because of my risk management rules. I am a firm believer, that some of the most profitable strategy may not be right for you based on your risk management goals. If you entered the cross of the open as price went to the downside in the 6:44 bar. If you had a 3 point stop, the 6:45 bar takes you out. Now some may say 3 point stop is too small or too big. It is neither, because we do not know the possible range yet.

If you trade the open or IB, today's best open entry, in my opinion, was the 6:45 PST bar. We had the open test drive at 6:39PST and a moderately strong reject indicating some paper on the downside. This was not a strong show of hand (until 6:50). Nevertheless given yesterdays close (which was an incomplete aution ended by the lack of time), where it opened today (well underside of value and range), overnight activity etc. was a decent edge (not a certainty). So shorting a weak pullback gives you a decent risk-reward for the day. Of course the next bar, a lot of paper comes in and gives you an oppurtunity for an add perhaps. The second short oppurtunity came in the C period.

The third short oppurtunity in the I period was aided a little by the lack of buying and covering as seen in the footprint below. Its a 5 min chart showing bid ask volume traded at each price and cumulative delta in the bottom. The short in the I period had an oppurtunity for an add as well. This trade though tested your pain tolerance or the pain of the gain as coined by Dr. Brett Steenbarger.

However, given the structure of the day ( which was a balance day) and the fact that when you got to the bottom the delta was divergent, it was not a trade to let run. Note the total cum delta was more than when it was was in the E period LOD. This generally means we brought with us less shorts than last time. Notice also the high number of hitting the bids but price unable to probe lower. This generally indicates buying or reloading of the bids. It is a great great oppurtunity to exit (even if proven wrong) the trade given the structure of the day (balance). It is not quite by itself an oppurtunity to buy though. Soon enough all the late shorts bail with the day shorts and perhaps some short term shorts and price comes to today's fair value.

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