The 3-2-1 Approach: A Simplified Method for Trading Any Market

3 Year Auction Today

F2 Comments: The market sold as per the analysis, but did find buying against 125-00, a very round number. When the retest held at 125-02/04, day trade longs and short covering entered the market and took prices to 126-04 at last look. A new distribution higher may have started at 125-09 in K period. Won’t know until the next couple of days are behind us. Think the recent selling and this week’s auctions warrant another sale to retest 125-00/08. If it holds the second time, will start to think long again.

Relief rallies can run 1 5/8’s to 2 points. Little news tomorrow. Think the focus will be the ES’s direction and/or the 3Y auction. The 3Y auction is usually a good one. Want to sell into early strength and see if 125-00/08 can be taken out. If not, will move to the long side of the market. Sell 126-03/07 or 126-11/15. Cover, if 125-00/08 then holds.

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Early Morning Comments from Charles Cochran on Tuesday 2/10

(06:49)_The OVN market found buyers. ES weakness???? 3 Y Note auction ??? Bank bailout plan to raise less debt on paper than originally thought. The 2-3 Y Note auctions are usually pretty good auctions. The OI in the 10Y Note dropped yesterday too. Not much risk in owning a 3Y Note from an inflation standpoint. So this coupled with the bank bailout plan could be the driving force. Markets don’t go straight up.

The 126-20/24 area was rejected two days ago. Might find some selling in this area again. Can sell failure at 126-20/28. If 126-02/08 holds as support, can be a buyer too. Will let the market put us into our trades. Auctions are very difficult market phases to call. Normal dynamics are placed in abeyance during auction times.
 
10 Year Note Auction on Wednesday

F2 Comments: A strong market today. Multiple factors were involved: Russian debt defaults, ES weakness, a normally strong 3 Y auction, and a potential flight to quality. The close was strong. The market activity analysis favors higher prices without news. Biggest dynamic tomorrow should be the 10Y Note auction and ES weakness. The normal course of action during a quarterly refunding is a good auction followed by a bad auction. If the rally doesn’t continue quickly in the morning, then the bad auction scenario becomes more likely. Can see two trades tomorrow: a sale with failure to take out the OVN session high, or a buy, if the OVN market sells and can’t take out support at 127-08/12.

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Reading The Bars

The bars that comprise theTrademaven F4 chart provide many clues about the intentions of the market. Each bar is a mini Market Profile distribution. The yellow is the value area (where 68% of the volume was traded), the red is the unfair high, the blue is the unfair low, the narrow magenta line is the mode (where the highest concentration of volume on that bar was traded) and the narrow green line is the volume weighted mean.

In the attached chart, I have circled two areas in which price rejection is indicated by the presence of overlapping red areas (the unfair high). The key is the close of the bar.

In the first example, there are three bars showing price rejection in the area of 126.29. In no case, though, does a bar close near its low. If price is being rejected around 126.29, why doesn't the market move lower?

In this case, you can see that price eventually moves higher as 126.29 is taken out. You start to look for this to happen because none of the bars came close to closing on their low even in the face of price rejection.

The second oval shows an opposite example. The market is attmpting to make a new daily high and is unsuccessful. The red area at the top of the bars is the unfair high. The second bar closes within a tick of its low, and after one more shot at the high, another bar closes on its low. When price breaks below the low of this bar, its time to get short.

Learning to read inside the bars will give you solid clues about what to expect next.
 

Attachments

30 Year Bond Auction on Thursday

F2 Comments: The quarterly refunding is going well. The 3 and 10Y Notes pushed the market higher over the last two days. The strength of the market will be gauged tomorrow based on where it closes after the 30Y Bond auction is behind the market.

There is some news to impact tomorrow’s trading. This news should be supportive, if as forecast. Jobless Claims is expected at -615K, Retail Sales at -.3%, ex-auto at -6%. Based on the idea of a good auction and supportive news,

I want to buy into early weakness and see, if 129-06 can be taken out. First buy zone is 128-17/21. Back up buy is 128-05/09. Exit and/or reverse, if 129-00/06 holds.

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Thursday's Wrap-Up

F2 Comments: The market did trade higher in spite of negative Retail Sales numbers. The focus was the 30Y auction. The Dealers were in control and it is tough to sell Bonds when they are selling. Those Bonds are supposed to end up in retail hands and the Primary Dealer community knows how to encourage that buying. The Bond recovered after it usual break on the auction and traded almost to the OVN session high at 129-15. Failure to take out that high and a short covering rally in the ES closed the post day session market lower.

The market can trade either way tomorrow. If the ES is lower, can be long. If the ES is higher, can be short. Will let the ES and OVN session guide us into the trade. First buy zone is 128-17/21, Back up buy is 128-05/09. Exit and/or reverse, if 128-28/129-00 is then rejected. Market must take out 129-16 to stay long.

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Charles Cochran's Friday Opening Commentary

(06:37)_The rally in the ES continued and sellers emerged above 128-16. The selling took the Bond to 127-235 OVN. The OVN structure favors the seller for now. If the day session can’t get through 128-08/12, I think the selling will increase in the day session. The early key will be whether the ES can continue yesterday’s rally or not. Not much in the way of good fundamental news to support buying in the ES, but short covering alone can take to 850+.

First sell zone is 128-03/07, then 128-15/19. If 127-24/28 then holds, cover. If ES does sell, first buy zone is 127-21/25 followed by 127-13/17. Today’s focus should be the direction of the ES.
 
Preparing for Trading on Tuesday 2/17

(06:09)_Strong buying OVN as players bought financials and sold stocks. The spending bill in the US has done little to reassure the world’s markets that US’s economy will be helped materially by this bill. As the US’s economy underpins the world’s economy the rest of the world’s economic fears increased bringing in new stock market selling. The flight to quality play is still intact. If the selling accelerates in the US’s stock market day session, the financials can get more buying. If not, then light selling from profit taking with a probable transition into a trading range. Little news to drive today’s trading.

Can see two trades off the opening, a buy at 127-25/29, or a sell with failure at 127-15/19. Will let the market sort out whether to stick with these trades or not. Sometimes it can take an hour or two after a long holiday weekend.
 
Bonds Pointing Higher for Wednesday 2/18

F2 Comments: Strong buying today off the stock market weakness that settled in round the globe. Politics is markets and the markets don’t like the currents politics. Too much spending. Not enough stimulus. The ZB’s close was strong.

The market is pointed higher tomorrow with some help from the news and ES. Some news tomorrow and it also should be supportive, if as forecast. Capacity Utilization is expected at 75.2%; Industrial Production at -1.4%; Import/Export prices and FOMC Meeting minutes. The focus should be the economic activity news and FOMC minutes. If the ES is lower, want to buy early weakness and see if 130-00 can be taken out. If not, will exit the long trade and look to the short side of the market.

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