Where is the market headed?

I don't like to make predictions about where the market is headed, because with my style of trading it doesn't matter (my typical trades only lasts 3 minutes). However, I like to do technical analysis of the stock, bond, and currency markets to see the intermarket relationships that are occuring. My main outlook on the markets is viewed through the use of volume by price charts. Yesterday I said that I saw support in ZN, and today, ZN rallied off the CPI number. Last March, we would have seen the stock indices trade inversely to ZN off of this number, however, the housing number came out and the inverse relationship wasn't seen this morning. I'm expecting ZN and JPY to turn bullish and the stock indices to turn bearish in the next week due to the relationship between the two. Last March, the inverse relationship between bonds and the stock indices was useful for spoting reversals during the volatile trading days we experienced. We had a nice run up these last 2 days in the stock indices. Normally you see 1 big up day followed by a second small up day, followed by 1-2 days of consolidation, and then a pullback. I'm expecting a pullback by the end of this week.





Here is a daily, weekly, and monthly view of ES, ZN, and the EURO.





Here's ZN on top and JPY underneath.



I'm also trying to keep track of the options on SPY, IWM and a few others. Today there was an increase in calls relative to puts, which I think means, people are selling calls. Also a large put position has been taken on IWM for May at $82.

HIGH PROBABILITY TRADE SETUPS

In this post I will be going over my typical trading day from the night before, to premarket, and to market close. I will discuss how I use the bond futures, the VIX, NYSE advance/decline line, NYSE tick, and block trades as a way to trade in conjuction with my volume based market profiling.

Volume based market profiliing-
First and foremost I look for trade signals in relation to the market profile. When price is away from the Point of control POC(highest volume area of the day) I look to take trades that would move back to the POC(like a mean reversion approach). To become familiar with market profile I suggest checking out Trading Naked's large number of educational links found at the bottom of his main page. Here are a couple charts which show what a market profiler looks for on a range bound day and a breakout day.(courtesy IOAMT.com)





My Trading methodology-
I look for short trade signals more so when price is above VAH(Value Area High), and I look to go long when the long signal is below VAL(Value Area Low). When trade entries are made with regard to volume profile on a range day, profit targets should be set to the POC, VWAP, or an exit based on a tick extreme. Entry points are based around block trades seen in IWM and SPY, with the prefered entry made at a tick extreme. When trade entries are made with regard to volume profile on a breakout day then I look to exit when there is heavy volume at a tick extreme.

The Night before the trading day-
What happened yesterday? Did we have a breakout trend day or a range bound day? If the previous day was a bullish breakout day, then I would have a bias to take trades based off my trading method that would be buying VAL and vice versa if the previous day was a bearish trend day. If the previous day was a range bound day, then I would be looking to short VAH and buying VAL normally; however I will also be looking for breakout trend days driven by catalysts such as economic news and in some cases breakouts based on technical analysis like having a 3-7 day narrow trading range(NR3-7). Below is an example of how I charted my volume market profile forecast for the next day.
(NOTE: All of my charts are set to Pacific Time, because that is the time zone I live in.)



Also in my research the night before I like to look at the daily, weekly, and monthly volume profile for the markets I follow by going to Chart-ex.com. By checking out the volume profile on a weekly and monthly chart, you can see volume gaps; which are areas that I typically expect to be filled. Here is an example of the volume profile charts from chart-ex on ER2 taken February 23, 2007. In the chart you can see price is trading at VAH on the weekly and monthly time frame, with a volume gap to the downside.



The start of the trading day-
Premarket: What is the news for the day? What could be the catalyst for a breakout trend day? In order to be prepared for pending news events I checkout the forex factory calendar, which gives pending news events for not only the US, but for all of the world; with regards to the currencies, bonds, and stock markets of the world. Rueters market calendar and Econoday,
are good as well for tracking US specific pending news.

Market open: Is there a gap up/down at market open, and if so, why? Most of the time the gaps in the morning are due to economic news being released before the morning bell around 8:30am EST. Most traders know that morning gaps are good trading opportunities because they have a high probability of being filled or at least partially filled within the first hour of trading. Here is an example from March 29, 2007 of a morning gap due to the GDP # being released before premarket, with the result of a 9pt gap on ES being filled with the first 2 hours of trading.



I will now discuss how I use the bond futures, the VIX, NYSE advance/decline line, NYSE TICK, and block trades as a way to trade in conjuction with my volume based market profiling.

Bond Futures-
Starting during premarket of the stock market I track ZN, which is the most heavily traded bond futures contract(I also track ZF and ZB contracts as well). When watching ZN I look to see if there is heavy volume being traded and if there are any correlations or inverse correlations between ZN and ES. Some days you can see an inverse relationship between ZN and ES and other days you will see no relationship at all. The relationship between ZN and ES is a more advanced trading method that should be used in conjunction with other intraday market breadth indicators as a way to help confirm your trading signals. Here are some examples of the inverse relationship seen between the bond futures and ES, ER2, and SPY.







Sometimes you can see a positive correlation between ZN and the VIX, seen more so during the first 2 hours of trading. Here's an example.



The VIX-
Sometimes you can see divergences between ES and the VIX. Here are some chart examples.






NYSE Advance/Decline line-
By watching the NYSE A/D chart you can stay on the right side of the trend and see where possible breakouts in volatility may be placed. Here are some chart examples compared with ES and SPY.






NYSE TICK-
The NYSE TICK is one of the best intraday market breadth indicators for gauging short term price movements as noted by the NYSE TICK expert Dr. Brett Steenbarger. Some of Dr. Steenbargers articles on trading with the NYSE TICK can be found at Traderfeed. Here are some of my chart examples using NYSE TICK.



ER2 example.



YM example.



This tick chart of SPY highlights block trades as red dots compared to NYSE TICK.



Here is an example of NYSE TICK compared to NYSE A/D.




Block Trades-
I filter for block trades(50-200,00 shares) on the ETF's of the underlying stock indices as a way to track large traders. I particularly look for these block trades around NYSE TICK extremes as signals for short term scalping opportunities and places to exit if I'm already in a trade. I do this because I don't have software like marketdelta, and I like looking for large volume trades in the ETF's because these block trades are seen as better signals when compared to ES and ER2 block trades. Here is a great article from Traderfeed on Tracking Large Traders. Here are some chart examples showing block trades highlighted as red and green dots on the ETF's I follow.





Here is a chart of ER2, NYSE TICK, and IWM showing block trades near NYSE TICK extremes.



Trade examples-
Here are a couple of my trading days taken from my journal that show my trade executions posted above the chart.

Here is an example of one of my trading days where I used a tick chart of SPY showing block trades for guidance in trading ER2 and YM. I looked for short signals because we were trading near VAH and there was no sign of a catalyst to turn the day into a breakout trend day.




On this day I saw a double top on NASDAQ A/D and NYSE A/D, with the NASDAQ A/D line being the more bearish of the 2 charts. Also we were trading in the VAH, so based on my volume profile trading methodology I used this as a way to confirm my short trade signal.

Market outlook for week of March 12-16 is,,,,,BULLISH!

I don't normally make predictions, but since everyone is doing it....and if I get this one right I might look good for calling it, so what the hey. All of the markets around the world tanked 2 weeks ago, and now we have the Shanghai index almost back to its 52 week high on this sunday night, and next week is end of the quarter for the big funds. The big economic #'s come out thursday and friday with nothing worth noting on monday. I think most retail investors are looking short because the chart setup looks so dandy as a bear flag, however, I'm looking at the volume profile and see that we are inches away from the lower end of the big selloff created on Feb 27. When looking at the weekly volume profile I see a volume gap, which, if you were to look at it, you would say we need to go up because there is weak shorts in this area that should be taken out. Also, the last week of the quarter can be volatile, and I've seen in the past that the bias is bullish because the large majority of long funds well be doing there usual window dressing. On the last friday of the quarter during the final 2 hours I see selling from funds closing out positions for end of the quarter statements. The "smart" call option sellers from Feb 27's selloff should have closed out all of there positions last week because most calls were so close to expiring worthless that it wouldn't be worth the risk of keeping the options open until expiration. We have a lot of money being thrown into QID, but what if the unthinkable happens and that volume gap in the stock market is filled? That quick money thrown into QID will be hurting, and shorts will be covering, and the market will rally, and retail investors will just shake their heads and say "when will it ever stop going up!".

In the eyes of Mr.Market, there are just to many VIRGINS (POC's) up there! (that's a market profile joke, yeah, I know I'm COOL!)




So there you have it, that's my reasoning for the bullish bias, however, if I'm wrong it won't matter for me, because I only trade intraday based on my signals given by my indicators. HAHA!! Good luck Swing traders!

HOLY CRAP Feb 27 daily chart

Well, I traded today, terribly to say the least, but still positive. I kept my composure and ended with the same profit as yesterday, kinda weird. I wasn't use to the volatility and found myself adding to losers, good thing I was right about holding on to some of my trades. I really need to work on just exiting a trade if it doesn't go my way within a few seconds after I enter. Maybe I should make as many trades a day as I can to get more experience like Dr. Steenbarger talks about in his book to advance my skill level, of course I would be doing this on the simulator until I get better. I really want to trade tommorow from the increase in volatility, but I realize at this point that I'm missing something to my trading that makes me the mediocre trader that I am. I'm missing the big picture and the skill to cut losers in seconds after entering them if need be. I should never be in a position that is more than 1.4pts against me when trading ER2, not even 0.7pts. The hardest thing for a trader is having a profit for the day and then going negative. You will fight back as best you can, but sometimes you just aren't on your game and you can self destruct if you don't set yourself with a risk limit for the day.

I have a feeling to go long, call me crazy, after the dow drops 500pts intraday, who would want to go long? I'm looking at crude oil, and its at where it opened for the day after spiking up 2 dollars intraday. If your good at trading then these times are golden. Why am I thinking to go long? Well, tell me why oil is not up and why gold sold off today? Bonds sold off all day today and the VIX looks like a ramp that evil kenivel would ride his motorcycle off of to the moon! I've been watching the relationship between oil, gold, bonds, and certain etfs, and I'm begining to think that there may be better strategy for me to trade than trading index futures. Right now, the problem is time, and getting experience to test my ideas. I need to write out a goal for what I want and I need to accomplish one goal at a time and move on to the next. I need an organized setup to my research and I need real time experience in order execution for scalping profits.

World market plunge

CNBC video of the markets dive.

Volume Profile works, but my computer doesn't

If your read my post on saturday, you knew what I was planning for today to have happen. I initially saw the volume gap between 824-819 on Feb 20th as noted in my jorunal, and I've been keeping a close eye on it. ER2 hit 819.1 around 1pm EST. Although I predicted what the market was going to do today I was timid to short the VAH on ER2 this morning. I have to admit, it was the ideal setup for the professional traders to inflate the market this morning with a gap up, putting YM right at the 38% fib level for my planned short. The initial 30min of trading I normally avoid because I'm normally still trying to figure out the markets direction. Today I lacked confidence in my execution of trades although I kept to my trading plan of shorting the market down to 819 and remained postive. I had computer hardware problems this morning, having my IWM tick chart stop working(which is the main chart I trade off of) and my internet connection went out 4 times this morning. For some reason my computer is running super slow right now and it is popping up with the message that my virtual memory is too low. My charts kept freezing today, so I'm stopping trading and taking the profit I got until I can figure out how to make my computer work right. I'm pretty sure it's from running too many charts at once(I have about 25 charts up, I'm thinking about getting rid of A/D and Volume market internal charts to free some space, as I rarely use them) I saw that 828 was a good short, however I was timid. The first trade of the day is always hardest for me because it could be a good trade, but I will often put a stop that is too close or once I get a small profit I trail the price too close, only to be stopped out and watch the price continue my direction. Today I bought the LOD again for the 3rd day in a row(it was the LOD when I stopped trading, also I just noticed it was an AMEX -100 tick reversal setup!), I took the trade this time on YM because I wanted to take less risk; however, I did it again. Once I had a profit of 1 tick, I trailed the stop and got hit, only to see 3 minutes later 10pts in my direction(If the trade was on ER2 it would have worked better, I'm begining to think I should stop trading YM altogether). So, my plan is to keep the initial stop and give the trade 6-8 minutes to move, or use my own discretion and exit if I feel the NSYE TICK doesn't favor my position. This weekend I was thinking about trading all day and what I was going to do. Today I made 1 bad trade by shorting ER2 when the NYSE TICK was in the low range and I didn't exit the trade soon enough, instead of -0.2pts, I let the trade run -0.8pts, this is all because I got greedy and tried chasing the trade instead of waiting for shorting on a pullback. This past week I've been getting better at exiting my losers by using NYSE TICK. Also, what has been helpful for me in determining market reversals is by watching VOLUME in USO, SMH, XLB, and most importantly this past week XLF.



Here's the daily chart:

Feb 26 week outlook.

Well one of my fib setups is buying a 38% retrace and that is exactly the level that ER2 has been holding this last week, however there is something interesting happening in YM. YM has retraced down to its 61.8% fib level, which is in my opinion bearish if YM cannout bounce through 38% retrace level. ER2 and NQ have been laggers to the downside this past week with YM and ES leading, so I will keep a close eye on weakness in these 2 indices as well as SMH and XLF as a bearish indication for ER2 to take out its volume gap and to hit 819 and possibly its VPOC at 816 made on February 20th. I will be looking for the possible setups to present themselves in the charts as described:




Checkout the Volume profile chart from chart-ex.com. There is clearly a volume gap on ER2 and NQ to the downside.

Planing the trade and what to look for on your chart

Large block trades noticed on IWM (50,000s block trades are red. 500,000s block trades are green).



I plan on studying this pattern in trading and combining this information with Volume profile analysis to find the best value in price.
What we are looking at is value defined by the largest traders. You will notice they only enter trades at tick extremes near the HOD, mid point, and LOD(alternatively the LVA, POC, & UVA). Are the professional traders buying the LVA, selling the UVA, or buying/selling around the midpoint. Also, where are the large trades being taken in relation to the 3-5 day volume profile.
Here is a great article by Dr. Steenbarger on tracking large traders.

What are the key questions we should be able to answer before entering a trade that will make the trade have a high probability of working?

1.What time is the trade being executed?
This question is important because you will need to base your stop and profit target for the trade according to the volatility. Volatility is also directionally proportional to volume; moreover, volume is highest during the first hour and a half of trading. Also, the initial balance (first hour of trading) normally covers 90% of the days trading range.

2.How are the major indices trading relative to each other?
If all the indices looked to be in tandem and trending one direction then this would be a strong indication to go with the trend and not fade the market. However, if ES is making a new high on light volume while ER2 is 2pts below its high while also on an uptick and we are 2 hours into the trading day, then this might be a setup to fade ER2.

3.Where are the volume gaps?
Volume gaps are important areas you need to be aware before the trading day because once the price trades into a volume gap the volatility can increase significantly from lack of established support or resistance.

4.What market sectors are trading up or down?
If all the sectors were trading down, then this would be a no brainer that we have a selloff taking place. The more sectors you have trading your direction, the better it is that the trend will continue. (I track some of the major sectors by following XLF, XLE, SMH)

5.What is the NYSE TICK value before you enter a trade?
Buying at 1000+ TICK readings may be dangerous because this value normally represents a climax in buying and is sometimes used as a value that traders watch to fade the market. By making sure you enter long trades when the TICK has pulled back you will be in a much better position of not buying the top. The same goes for when entering short trades as well; moreover, you want to short when the NYSE TICK is in a high range relative to the day, and only when the trend of the market is down.