Monday, April 02, 2007

Dissecting The Morning Trade

Recall from my recent post that we ended Friday with an inside structure. We also had a situation in which the overnight range dipped below the structure low before returning to the end of day trading range. As noted in the recent post, the inside structure gave us a pivot value of 1431.25 in ES, with R1 = 1434.5 and S1 = 1428.75. If we consider the overnight/preopening range a single bar, then we obtain the following pivot targets: pivot level = 1431.25; R1 = 1435.5; S1 = 1428.75. Notice that these separate calculations provide us with very similar targets.

You can see in the 2-minute chart above (blue = ES futures; red = NYSE TICK) that we traded in the narrow range of the preopening market until 10 AM ET, when we had the release of the ISM Index. Note that the positive TICK was unable to move the market to new highs. That's the condition of inefficiency that frequently precedes market turns. With the release of the data, we saw a breakout move to the downside: a move outside the opening range on enhanced volume and much weaker TICK. The general rule on such breakouts is to enter the market on the first bounce (in a declining market) or pullback (in an upside breakout). The weakening or strengthening market will follow through in the short run to provide a profitable trade. Notice how we took out the S1 target handily. Notice also how selling volume dried up before we could hit the S2 target of 1425.50. That was our first sign that the down move was losing its legs.

After a bounce, we had renewed selling and a new low in the NYSE TICK a little after 10:40 AM ET. This time, however, the selling could no longer take us to new price lows for the day. Again we encounter inefficiency, this time to the downside. The immediate idea that you wanted to entertain was: Selling is drying up above Friday's low; we're in a trading range and will return to the midpoint of the range (1431.25). That made a great trade.

These are the setups and supply/demand shifts that you want to train your eye to see daily. As we saw in the post about Marc Greenspoon, such training requires intensive exposure over time and a willingness to view and review markets and their patterns. It's a particularly nice feeling when you not only see *that* a market move is happening, but also understand *why* it's occurring. There is more to markets than price. Understanding shifts of volume and the tendency to trade at bid vs. offer helps us apprehend the supply/demand dynamics that tell us why a market is moving.