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

Preview For Monday 9/22

F2 Comments: The Central Bank intervention rallied the stock markets around the globe and brought heavy selling into the fixed income sector. The question for Monday’s market is whether this was new selling or just long liquidation. The OI in the 30 Y suggests more long liquidation than new selling. Not so in the 10Y. If the selling continues Monday, the conclusion will be new selling. No news to drive Monday’s trading. The structure and market activity point to lower prices on Monday. Want to sell early strength and see if volume will build below 117-20. If not the market can snap back. First sell zone is 117-31/118-03. Preferred sell zone is 118-11/15. Cover, if 117-16/20 holds.

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Tough Call For Tuesday 9/23

F2 Comments: The market opened lower and did sell hitting 116-13 before the selling exhausted itself. The market did begin a slow recovery off of the selling in the ES. The financials ignored the spike in crude and gold and closed at 117-135 in the day session. Tough call for tomorrow. Bond didn’t rally w/any momentum off the selling in the ES. If the ES continues to sell OVN, it should at least hold the Bond in its range and may take it higher. Would like to sell the 117-28/118-00 area for a retest of 117-04/06. Think the Bond is looking for a retest of support before it can rally some more. IF ES is sideways to higher, sell 117-27/31. Cover, if 117-04/06 holds. If the ES is selling and the Bond finds support at 117-08/12, can try the long side and see if 117-28 can be taken out.

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Waiting for Congress To Act

F2 Comments: Market was range bound due to the pending CDO debt bailout legislation. Will probably be that way again tomorrow. See the market as a range trade until the Congress acts. Resistance was tested today above 118-00. Expect support to be retested OVN. Some news to drive the trading tomorrow. Durable Orders is expected at -1.3%, Jobless Claims at 445K and New Home Sales at 518K. If as forecast, this news would be supportive for Bonds. Preferred trade would be to sell strength in the OVN session at 117-07/11. Buy zone will be 116-09/13. Will let the OVN session yield our support and resistance levels.

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Volume Exhaustion on 9/25

This example of volume exhaustion belongs in a textbook. Buy when price trades out the top of the exhaustion bar.

The run up after the exhaustion was 19 ticks or $593.75 per lot traded. Part of that could have been yours.
 

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Preparing for Monday 9/29

F2 Comments: A trading range day when it was all said and done. Day session close was neutral too. Profile pattern was a D. Based on the objective data and news the market should remain in a trading range. Next time for a potential move will be when the bailout is resolved. Some news on Monday: Personal Income is expected at .2%; and Personal Spending at .2%. This isn’t market moving news. Can sell failure above 117-20. Or buy w/signs of support at 116-21/15. Two sell zones: 117-19/23 or 117-27/31. Buy zone is 116-21/25.

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Early Exhaustion on Monday 9/29

There were two setback trades on Monday morning, but since I've been talking about volume exhaustion recently, I'll use the VE example.

The 10:15am bar was 20 ticks in length but the 10:20 bar continued the move. Even though it was a 10 tick bar, the volume, as demonstrated in the histogram under the chart, was as high as the 10:15am bar.

When price traded out the bottom of the bar, it was time for the short. The market dropped 8/32nds ($250 per lot traded) before there was a meaningful retracement.
 

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A Heads-Up for Tuesday

F2 Comments: The news drove the market all day. The Congress’s failure to act on the bail out bill was smoked out early by the markets and the Bond hit 121-00 before the buying was over. The close was strong. The market activity favors higher prices or a retest of resistance tomorrow w/out news. If the ES is sideways to lower, I want to buy early weakness and see if 120-20/24 can be taken out. If it holds, I will look to the short side of the market in anticipation of further development. First buy zone is 119-29/120-01. Back up buy is 119-21/25. Exit and/or reverse, if 120-20/24 is then rejected.

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Tuesday 9/30 Recap

F2 Comments: Another huge day. This time it was lower. 120-00+ stopped the buying and when the market took out 119-16 the selling didn’t stop until 116-28 was hit on the close. The market activity and structure favor selling to retest 116-20/25. If this level holds, we could see some new buying enter the market given the forecast economic news this week. If the ES is sideways to higher, want to sell early strength and see if 116-20/24 can be taken out. If it holds, will cover. See two sell zones---117-11/15 and 117-19/23. Naturally would like to execute at the higher level. If the market can’t take out, 116-20/24, will look to the long side of the market.

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Volume Is The Attractor

In the attached chart, I've consolidated the Market Profile distributions for the last 5 days and compared it to today's distribution. The histogram on the right side of the chart represents volume from the last 180 days. The shaded area superimposed on the TPO's is a histogram of the volume from the last five days.

As you can see, today's distribution is sandwiched between the high volume areas both above and below. High volume acts as an attractor, and if not immediately penetrated, the market will trade around it for a couple of hours.

The red letters at the top of the distribution represent the unfair high. The black letters represent the value area (where 68% of the volume has traded). The green letters are the volume weighted mean, and the magenta letters are the mode (where the highest volume of trades have occurred).

Today was a consolidation day, an inside day. Tomorrow is likely to be the same, unless Congress passes the bailout plan or there are some significant rumors.

Knowing where the high and low volume areas are helps you to envision the type of day that is setting up. Knowing that only a significant news event is likely to get the market to trade very far into the unfait high gives you an idea where tomorrow's high is likely to occur. Knowing where the market needs volume gives you a strong clue as to where the consolidation is likely to happen as well.

Taken together, we are in a trading range and are likely to stay there until there is news from Congress.
 

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