Friday, September 5, 2008

Buying a high for a higher high

I missed the long trade at VWAP as I was buying some stocks for investment ;-).
I dont personally like this trade but serves as a great example for tape entry.
Its all based on the orderflow.
Price fails to make a reversal. Every attempt to sell has been halted by resting bids.
Finally there is a big order to sell (3K)(11:41 bar with chart filtered @ 100 contracts above) that gets absorbed and more important an initiative lifting the offer of 1.5 K and 1K orders (see tape on top). A combination of events that gives you a very high probability entry for a quick trade. Flow with the bigger money.

The ominous resting bids

The chart below illustrates the buying at resting bids that got reloaded @ 30.50-31.25 (10:05 pst). Trade yields a 3 point scale out so far and stop at BE. Notice the increase in volume and sustained bidding. Price is now trying to break above.

Toping for a possible rotation

Nice little weak pullback. Opportunity for a short. Keep in mind. The bigs delta is 20K positive and we have come to a delta neutral overall. There is both covering and and moderate bargain hunting. We are very close to mean and might consolidate through this area. After lunch might bring some decisive direction. Place for a very tight stop personally. If the orderflow continues to be on the buy side, additional covering will bring us inside yesterdays range. Its important to rotate and break through the 30 level. Notice that the G period extended IB and the weakness needs to build for a reversion trade.

Price at VWAP and mean

Price has come up to VWAP with a little buying by commercials.
The 100 contracts filtered chart has turned a +ve delta (7K). This makes it a dangerous selling at VWAP. The general Delta is still about -16K negative. So bigger money is slightly on the buy side (mainly covering). Mean is at 1224. With dynamic mean shoing a little shift upwards. So far it seems we might balance.

Thursday, September 4, 2008

Dominant flow at a key level

Todays action was very unorthodox. After the non-farms payroll got out @ 5:15 we got an early reaction, the unemployment claims came out as well @ 5:30 we got a reversal of a test of the 1272s. The dominant flow came at 5:45 and 6:11 to the downside which led to the test of the 62s.

The s&P500 opened right outside of value to the downside. Which was ominous. What surprised me though is the time it took for the sell off or a retest of the 62s. 6:48 bar got us the dominant flow of the IB. The lack of follow through was deafening. At that point I was thinking that a test of overnight high was possibly in store. Peter Steidlmayer, proposed the market profile with each time segment as half hour blocks. His reasoning was that this was about the time needed to gauge a true reaction of the market. It took substantially longer that that today. If you took a short at or before the open, it was one of the toughest, mentally. Especially since the low seemed to hold for a while and you are shorting against a key level that we have talked about for ages. However, the drying up of the buying interest at the 6:57 bar was a clue to the resting offers and soon enough the paper came in on the down side. Total Delta was -23k.

I failed to point out yesterday and post the 3 day profile which had an increased TPO count to the bottom of the distribution and it indicated a propensity to break to the downside. However yesterdays buying towards the close was convincingly deceptive and it brought it back to the days balance. This is why we need to adapt to a new reality everyday. Yesterday was a hook day. The macro news breakdown possibility that I posted came in the non-farm payroll and unemployment books. The open call right after the news at 5:15 AM pst brought it outside of balance. It created a new forcing point with which longer term participants have to view their inventory or the lack of.

It lead to a sustained and controlled, yet convicted, selling once the 1260s level was broken. Technically, the reaction at the current level of the 30s and potentially 1200s will be a key indicator of where long term participants see value. Todays auction as it stands remains incomplete.

Watch out tommorows non farm employment change report and unemployment change at 5:30 PST. It is going to be well read by all timeframes.

The trades at IB today were the hardest to take and toughest to hold at IB. The best oppurtunity was a VWAP and price never tested the vwap for the rest of the session.

Wednesday, September 3, 2008

An important non event day

In my blog I would like to focus on things that my readers find useful or new. You all know what the indicators are doing in the daily and hourly charts so I wont repeat it for you. One thing though, we are testing the 50-day moving average on the daily chart. We had a good test of the 1260s. The chart above is monthly profile. Notice the TPO count vs. prior month. How crucial the 67s have become and profile still points a higher potential break up. Compare this with the chart in the bottom. Same story. You see the significance of holding this level. We are still within the short term balance.

Now back to today. Frankly, I like the volume and response today. It seems to me that the overall sentiment for the longer timeframe buyers have not yet changed. In other words we are still inside the forcing point threshold.

If you noticed todays profile being built. There was an embryonic double distribution sell off in the beginning half of the day. H period reclaimed the single distribution structure and the buying continued enough to erase out more than 30K of negative delta. So while price ended up doing - well not much, The buyers did come in and some major shorts were covered.

So unless their is a major sectoral breakdown. We have a good probability of holding support. However from a price action standpoint we are at a very crucial point. We need to break the resistance of 80-84 level and retest the 1290s. The price rejection from the 1267 area has been so strong that any break down through the 60s may be violent. It can more likely establish a double excess low (double bottom) that is a healthy technical bottom for a potential reversal. That is almost obvious. But the second wave of the economic downturn has just begun to be quantified as measurable data. Although most of has been built in, any new surprise in either macros or geopolitics is going to be very ugly. Take a peek at the hourly 3lb chart below.

What might be in store ? Well if we open above settlement and settlement is bought during IB, there is a good chance of a good test the 80-84 level covering the single tail there. and if we can do that without a dominant flow reversal, a quick test of the 90s is in store. However based on the price action and where the value is, a balance day is more likely if we open within range and value and make a wide IB like today.

Trade wise today was a small loser on the ES. Did not short the IB or C period because it did not give me a setup, although it was a very good short setup if you short VAL as it opened below VAL. The loser came from my short at VWAP which got chopped (was first profitable before the greed machine came on) with the ying yang. It eventually went my way before the true buying kicked in. Anyways should have gotten out at entry as Beige book was coming out. Did not. Note to self.

Frankly, I was busier in my CAG short which was beautiful. Great risk reward too. Was peaceful a trade as perhaps ice fishing. Nothing like the seesaw in the ES.

And finally the masterpiece of a 3lb daily chart below. No other chart can draw such a long story in so many words. Again, spells out the significance of establishing a good support here. BTW, which longer term of the longer terms are trading this chart? ;-) Puts everything back in perspective of the time frame universe. There are again infinite time frames. Good trading.

Tuesday, September 2, 2008

Double Whammy Tuesday

A complete breakdown of structure from how the morning started. The dominant flows got reversed by the ISM news which showed shrinking factory activity trending towards contraction. Secondly, the hurricane Gustav good news was completely overshadowed by Hana and others that might follow.

The trade opportunities today were- B period short opportunity after the reversal. And a beautiful short opportunity at VWAP. There was another short opportunity at .382 retrace @ 10:40 PST (which I did not take). I just had the VWAP trade as winner. My B period trade got scractched on the pullback. I did take a long at the 85.75 level which got stopped at entry after a 3point scale out. That was the reason for the missed oppurtunity @10:40 pst ( you miss the train when you are riding the wagon).

It was one of those days where the retraces were shallow. Very difficult to read during the IB. Who knew the trade you scratch would be a 30 point winner. The key to the sell off read was what the big money was doing (orderflow) - reversal of dominant flow @ 7:12 pst. More importantly, how the news was received, crude oil and hurricane related news. Of course energy sector, and tech was a drag all day. It was a day if one was not in tune with the news and orderflow, would have had a bullish bias until it was too late.

Multi-time frames involved in the sell off. We have rotated 3/4 of our balance area (short term) in one day. The 63 level retest is just 10 points away.

Sunday, August 31, 2008

The importance of a good start

In sprint race, swimming or any speed sport, the start is one of the most important part of the performance. I have begin to realise that as a trader it the same. The first trades are mentally the easiest to take at least for me. My losing trades are statistically more concentrated in the starting trades as well. In the majority of days I find myself in the zone after the 1st trade or couple of hours of watching the market action. If you take 3-4 trades a day, its like in a 4x100m race, where would want the starting sprinters to get you in comfortable lead to build upon - or at the very least not be far behind.

That's one of the reasons why I like to trade after I get a good grasp of the structure, bias and type of day. The initial balance gives you a good introduction to the day that might unfold.

Friday was profitable day for me, netting me my average profit. It was however, not an easy day to start with. I had the notion that we might balance based on where we opened and price action preceding market open. The 3 line break chart gave an indication of a low volatile day, the .75x3 Pnf chart indicated that we were flat lined to downside based on the moving average. I don't trade setups on these charts but they are a good barometer, that takes away the noise of time.

I took a long in the E period based on order flow. As I did further research,
it was a trade that could have been taken but not the good quality (refer back to news etc. -consumer spending higher) and frankly better stayed out and waited on a direction. However the most important thing about trades like these is that you have to manage them very conservatively. Then came the news on income which was the lowest fall in 3 years. It was a profitable trade that instead of scratching at break even I let it stop me out, as the selling momentum went from a trickle to more desperate short terms getting out.

The interesting thing though is the effect of such a trade on your risk management and trades for the rest of the day.

I took a long in the F period after the news was absorbed and the selling dried up (dry up volume) and price found temporary support near DBY VAH. It was a half sized position (more conservative mainly because the buy response had not been seen yet). The order flow favored a retrace and when it initiated, I tightened my stop further. I took my profit near VWAP.

Now I recouped my loss and slightly in profit. I was looking at VWAP as possible shorting opportunity. But VWAP generally is close to the dynamic mean (which means chop). Finally the price is here where I want to get in the direction of the sentiment. The big contracts are delta more delta negative and the general market. Everything is lining up.

However I didn't want to end the day in a loss since the week's been descent. I entered 1/2 size short position 1 tick below the VWAP (90.75) on a down tick. Price went in my favor and then it stopped me out at even (generally mean requires a bigger breathing room). I reentered again when the general market parameters lined up again at VWAP (90.25) on a half size. Now under normal circumstances it would be full sized and perhaps an add to the position soon after follow through. I used a conservative strategy for the add as well.

I had order for 2 contracts add on a sell stop at 87.75 which was the swing low of this inverted M formation (double top). The reason is that the bailing out of late longs from the swing low often provides a momentum to the double top failure. However, due to the price action, I took out 1 add at entry (87.75) as it came back to me(again a conservative step). Took profit on another at 85.75 (preservation of profit) and I was all out at 83.75.

It was almost a 10 points move on which I got less that 1/2 the possible profit (all contracts). Simply because I let my guard down on the first trade and switch to conservative hat. Now this last trade was the best trade of the day in my opinion unless you shorted the 96-97 during IB. Like all good trades, it was the toughest to be in. The effect of a bad starting performance is that it puts you in a survival mode which restrains the rest of your trades working to full potential. Now, I have added to my strategy to be mindful to treat the first trade as the first sprinter of the 4x100m and focus on profit or breakeven.