Market Profile

My ramblings on support and resistance, supply and demand are even making me nauseous so I figure I will try to enhance my trading prowess but looking at something that sums up volume at various price levels.  Specifically I want to see the amount of trading activity (volume) transacted at the area of support and resistance defined by the all knowing PnF chart.  What I am looking for is to see if the amount of volume transacted at specific support and resistance levels has any significance in the strength of those levels.  I suspect they do.  Therefore, my research (google search) has lead me to the Market Profile indicator (I hate the word indicator).  So I will do my due diligence and read books on it, search websites on those that claim to be experts and mock them along the way but the end result should still be valuable.  Studying is always valuable so do more of it.

As for the markets, well it looks like we hit a low of 1627 on Tuesday before bouncing and continued the rally today.  We were looking at the 1625 area as we mentioned in our previous post after that nasty high volume drop on Monday so please forgive me that I was not pin point accurate. I have to say that the current two day rally has not been overly impressive.  Tuesday's recovery rally clearly showed demand coming into the market but today's lackluster rally on lower volume and close slightly lower then the middle of the trading range does not buoyed well for a continued rally.

So lets wait and see what happens. 

Going back

Education is the passport to the future, for tomorrow belongs to those who prepare for it today.
Malcolm X 

We all know (except for Ms Cleo and her crazy network) that we (retailers) cannot predict what tomorrow will bring in the stock market however, we can prepare for what it eventually brings us.  Of course that is the whole idea of this blog.  Preparing to trade by identifying key areas of support and resistance and looking at volume for clues for high probability trade set ups.  Remember I said high probability and not guaranteed. 

Posted below is the 60min PnF chart posted back on July 19th highlighting key areas of support and resistance. This is what you call preparing for tomorrow.  We make our decisions only once price approaches these key areas of support and resistance because these are the areas where the battle of supply and demand ensued in the past resulting if large moves thereafter. Therefore, if we are keen enough to interpret who is winning this battle maybe just maybe we can jump on for the ride.  You will notice that these price levels haven't changed very much as you should expect if they are significant areas of support and resistances. 

Where are we now?  Posted below is the 60 min PnF chart of the SPX as of today's close.  You will notice that I've highlighted the next area of support and resistance at 1624.3.  You will also notice that its about a point away from the 1625.2 posted above.  My gosh its changed!   Yes of course it changed due to the change in volatility.  Remember the box sizes are calculated using the Average True Range for the past 20 periods which changes...duh!.  The important thing to remember is that the 1625.2 (1624.3) area saw large price moves after it was broken so to expect the same would not be unreasonable just not guaranteed.  Remember we call this high probability trading. 

Below we have plotted our support and resistance areas on the SPX daily chart.  Today's price and volume action was nasty.  We gapped right to support (now resistance at 1653) which saw a large amount of supply come into the market closing the day near its lows on the highest volume for the month.  The media blamed it on Syria? Sure whatever...Syria.  The lead up to the sell off is more interesting as you will notice that the recent up move (blue highlight) was done on light volume indicating lack of demand on the professional side.  This gave us a clue that the selling might continue from the Aug 15th decline (first yellow highlight).  

We now see that 1625 is fast approaching.  This is where we watch to see how price and volume react before making a decision to go long or short. Fun times ahead!

Thanks for reading. 

Another range?

During my break at work (as I would never dare watch the markets on the company's watch) I loaded up a 15min SPX PnF chart and of course copied it and posted it below. You can see the time was 12:40pm and you can also see the importance of the area 1656.4.  So it is a coincidence that price closed at 1656.96 today? Maybe?  As amazing at that is that isn't really what I want to discuss (read the title for a clue).

Below is a traditional daily PnF chart of the SPX highlight two price points where significant moves occurred in the past once they were broken.  These price points also tells us where the battle of supply and demand may happen again.   If you understand that then you will understand that the 15 min PnF SPX chart above is showing you that this battle of supply and demand is happening right now is what many would call a trading range. Many believe that a trading range a stalemate in the battle of supply and demand.   I don't.  I believe a trading range is a phase of accumulation or distribution and once that phase is completed then price will move in accordance to that phase (accumulation = up, distribution = down).  The longer trading range last and the larger the volume is during that time will dictate the potential move.    The last trading I spoke about lead to a quick sharp decline from 1684 to 1640 in a matter of a few days.  Just as we spoke about regarding that trading range, we once again have to look at price and volume for clues as to the potential move.

Below is the daily SPX candlestick chart and you can see that the 50dma is acting at resistance ever since it broke that level a week ago.   Although today's price action was bullish with price closing near the highs of the day the volume was rather weak.  Actually it was one of the lowest volume days for the month.  We all know to break resistance you need volume (demand to overcome supply).   However, as I've been harping on this blog we don't anticipate we react.  That means this could all change tomorrow but don't be surprised if we reverse lower.  If we don't and we move higher out of the trading range will then we jump on for the ride.

Thanks for reading.

Where we at?

In our last post we saw price hanging around the the 50dma with PnF support just around the corner at 1653.4.  After three trading days since then where are we at?  Well not too far closing at 1652.35.  However, those three trading days are very telling so lets go through them.  First lets review the daily PnF chart so highlight the importance of the 1653 area of support and resistance.  It is important because it was after this level was broken that price continued higher to all time highs. 

So here were are now so lets look at what has been happening by looking at price and volume.  Below is the daily SPX candlestick chart which highlights the area after 1685 support was broken.  We concluded that the previous trading range was distribution and that a high volume price drop would ensue which what happened.  So if we were focus our attention to the last two trading days we saw a break of the next support level at 1653.  What was interesting today was the test of this broken support.  Prices rallied back to the 50dma before reversing (resistance) and closed right at what is now resistance at 1653.  So what we do now is wait to confirm if indeed this is a test and look to see if prices continue to lower.  If it does then we look at the next support level which I will let you fine folks figure out! 

Thanks for reading. 

Is Broken

As we spoke about in yesterdays post we were patiently waiting for a break of the trading range and although we were leaning bearish waiting for confirmation is always the prudent choice (or calling Ms Cleo).   The trading range we experienced was clearly (ok now its clear) distribution and as we mentioned yesterday a larger decline would ensue and decline we did.    As we also expected we saw a large increase in volume.  Unfortunately, a large chunk of the decline happened on the gap down open (hate when they don't give the little guy a chance).  The good news is that we know ahead of time where the decline may stop or at least pause should prices continue its drop.  Below is the SPX PnF chart and we can see that 1653.4 is the next level of support.  Additionally, we have the 50dma at 1656.74 (not shown) which is also a potential area of support.  If and when we make that trip to support and not just any support but converging support (PnF support and moving average support) which is the best kind of support we will reassess.  For those of you that are short try not to blow a decent trade for those of you that are long well...good luck.  

Thanks for reading! 

Mr Magoo!

Mr Magoo! I may be blind but I can see you!

Speaking of blind even an one-eyed pirate would be able to see the recent trading range we have been for the past month just by looking at the SPX PnF chart below. We spoke about the significance of the 1684.3 support and resistance area (I know I know the chart says 1685.1) in previous posts but you can also see that 1697.40 has been growing in significance over the past month.   This trading range is very critical because it can represent only one of two scenarios.  The first being that if the 1684-5 level holds as support on a daily basis this range can be viewed as absorption which would result in a bullish move higher past overhead resistance of 1697.4 and of course the all time high of 1709.67.   The second, more bearish scenario, is a break of current support (1684) which would indicate to me that this trading range was nothing more than distribution and a large drop would be the consequence.

I was providing this very same market analysis to a friend of mine today and their question in the end was 'So which way it is going tomorrow?'.  My answer was 'I don't know!'  It was funny the look I got when I finished explaining the concepts of supply and demand, support and resistance with such confidence only to say ' I don't know where the market is going!'.  You can imagine the 'you are full of it' face and look of disappointment that I received at the realization that I don't have a crystal ball.

I prefer to react to market moves versus anticipating them.  I do that by first reading the 'story' the market is telling me and build a case to initiate a position.  I have to convince myself to go long or short by analyzing the market objectively .  Lets see what the market recently has been doing in this trading range.

1. Price closes at resistance near the highs of the day on increased volume.  The fact that price was unable to break resistance on higher volume may indicate this was a transfer of ownership from the large players to the retailers.

2. Price drops confirming previous days bearish behavior. However, price closes at the 20dma support.

3. Price breaks below the 20dma, hits support and bounces to close near the top of the trading range on declining volume. This is bullish as demand overcame supply at predefined support.  However, price did close below the 20dma.

4. The price range was the largest in two weeks. Price dropped to support and bounced once again to hit both predefined resistance at 1697.4 and the 10dma before backing off and closing above the 20dma again. With the increase in volume and price closing at the top end of the range this would indicate bullish behavior.

5. Price drops on increased volume closing near the low of the day at predefined support of 1684-5 area. This is obviously bearish since the high volume and poor close indicates supply entering the market.

As I write this out I'm realizing the whipsaw action within this trading range and see how those less patient could get frustrated.  This only solidifies my rule of reacting to market movements at critical levels.  Never once did price break and close above/below any of the predefined support/resistance levels on increased volume to justify a position be taken.  As of now the story has turned bearish and a break of support on increased volume would confirm our bearish scenario and would prove to me that a short position has a higher probability of success than a long position.  So ask me again where do I think the markets are heading tomorrow and I will tell you to call Ms. Cleo.   As for me I will wait patiently and react accordingly.

Thanks for reading!

Lack of demand

Just like this blog there was a lack of interest by market participants not only to read this lousy blog but in pushing the market higher after Monday's small range day on low volume.  At first glance I viewed it as lack of supply but Tuesday's drop closing below the lows of the previous two trading days made it obvious that Monday was actually lack of demand.  Isn't hindsight wonderful!  Tuesday's close was accompanied with an increase in volume indicating that supply was entering the market.  We still had the 10 day and 20 day moving average (dma) to provide support and then of course our PnF defined support at 1684.3.  So what did today look like?

Below is the daily SPX chart with the above mentioned price points.  Today's intraday low hit our support level to within .61 of a point (pats himself on the back) but also notice that the 10dma acted as resistance and the 20dma acted as support on a closing basis with volume increasing.   Furthermore, price closed near the top of its price range today which indicates demand was present at these levels of support to push price off its lows. If you have been paying attention to my blog and in turn learning to because a stock market guru you would remember that support is where you expect demand to overcome supply which is what exactly happened today.

The next chart below is the 15 min SPX chart which highlights the concept of a test of support and subsequent retest on lower volume before a move higher.  The lower volume on the retest is an indication of lack of supply so the downward pressure is minimal and the market is allowed to move higher.   So where do we go from here?  Well the past two days now appear to be accumulation and after today's bounce from support and closing above the 20dma the trajectory is up.  If it does continue higher are next inflection point would be the all time high of 1709.36.

Thanks for reading!

Overbought?

Just like support and resistance are words tossed around by those looking to impress people at the local wine and cheese soiree, the word overbought is another one of those terms people use but don't understand.   If you look up the meaning (like I always do) you will get a number of interpretations.  Here are just a few with my two cents included of course. 

i: A situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals. 

(When did any stock trade in accordance to its fundamentals?  Didn't AAPL have a $1000 price target?)

ii: A market that has advanced to a point at which, historically, it has tended to reverse and move lower.  

(This sounds like the definition of resistance doesn't it?)


iii:  The technical indicators on the security do not justify its current price 

(This is my favourite because its so ambiguous   When did technical indicators justify the current price of a stock since most technical indicators are a derivative of price?)

As you can see there is a fair bit of discrepancy in the definition of overbought.  I'm not saying that the term doesn't apply in the stock market but instead I recommend that you define it for yourself versus using the term loosely in an attempt to sound knowledgeable   I personal don't use the term because I don't view the market as overbought or oversold.  I view the market in terms of large market participants either accumulating or distributing stock.    Therefore, if the market has run up considerably I look for signs of distribution at predefined resistance levels.  I guess the only people overbuying this market would be the retailers during these times of distribution.  Maybe this term only refers to them?  

Enough of my digressions and lets see what the market has done this past week.  In our last post Wednesday we identified that the daily bars and volume were signaling bearish behaviour but until a break of support at 1684.3 happened that the prudent move would be to wait.  If it had broken support you would had all the evidence you need to confidently go short.  Aren't you all glad you listened because those that decided to jump the gun and short received a handsome helping of whoop ass as the very next day the market broke out of its trading range and busted higher into the 1700's for the first time ever.   I'd like to highlight a couple of things:

1: After the breakout notice how price dropped the following day to test the breakout area (yellow line)  before rallying to closing at the high for the day.

2: The increase in volume above support was actually accumulation and absorption of supply at this level preparing for the breakout.  

3:  Although volume has been dropping, today's small range red candle on low volume could be viewed as lack of supply vs lack of demand. 

So far there is nothing signally a stop to the current rally.  We will continue to read the bars daily and try to interpret how the market is positioning itself for the next move. 

Thanks for reading!