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Today’s Notes

Recently, I have been conforming my daily notes into something legible. My goal is to help you improve your day trading by sharing my process and thoughts. Today’s chart (Friday) appears above. Obviously, it is extremely time-consuming to translate my crib notes, much less annotate the rest of what goes on in my head. I cannot do this frequently but will do so here and there when the spirit moves me. Importantly, the same principles articulated in the notes and on these pages generally apply to any time frame, including the daily, weekly, and monthly charts. The upper time frames can be a cakewalk if you can execute the principles on a 5-minute chart.

Since you may not be reading this on the day published, references to “today” are for the S&P 500 Continuous Futures Contract day session on Friday, August 6, 2021. References to yesterday are for the previous day session on Thursday, August 5, 2021.

Today in the Life of A Day Trader – The Play by Play

I always start the day by revisiting the current narrative. Any carryforwards I deem important are outlined in the Pre-Market Outlook on these pages. For example, the market’s task today was to hold yesterday’s high or not. Yesterday’s high was the balance area high of the past two-week consolidation.

We were opening above the high with a gap, and If the breakout failed, the implications were profound. I highlighted the risk in my reference this morning to Balance Rules. A failed breakout by the close implied a move back down to the balance area low at 4365.25 or worse. At least for today, we did not have to face that predicament.

I also want to be aware of the position of the daily chart, essentially the macro picture and anchor chart for my day-trading. What is the Navigator Algorithm communicating? What clues can be garnered from recent price action, the distance from the mean, patterns, etc.? Where are the positions of the nominal 40, 20, and 10-day cycles on the daily chart? When is the next trough due? How close are we to it? As an example, here is the position of the current nominal 10-day wave painted with the vertical lines on the RTH hourly chart below. The next trough is due August 10th. We closed Friday about 2/3 into the cycle.

Even if everything else is fine, markdowns of the larger cycles can catch me off guard when I am trading in the 5-minute weeds. If I want to get super granular, I track the nominal 5 and 2-day cycles on the hourly or two-hour charts. Also, I typically run the intraday cycle lines on my five-minute day trading charts once I discern the beat. Clearly, though, the larger the cycle, the more it will exert its influence. You can see Friday’s intraday cycles in the chart below.

Remember this about cycles – they are not a religion. They give you context. Like most indicators we encounter in the markets, cycles are imperfect. You can see that the cycle low came in a bit late on Friday afternoon. No problem, you continue to expect the low, but use your other work to confirm a pivot/reversal. The point is that after 8-10 candles, look for a cycle to peak in an uptrend. In a downtrend, it will peak earlier. In strong up and downtrends, the cycles are barely discernable. When you are approaching important support or resistance, discerning a coincident cycle peak can give you an edge. This is true in most any time frame,

Whether the cycle peaks to the left or right, also known as left or right translation, tells you a lot about what the market is trying to do. You will get the right translation (uptrend) coming off the bottom of the range and left (downtrend) coming off the top on a range day. There might be an exception if the first few candles in the cycle are parabolic, but you can generally follow those rules. Cycle highs and lows are also the right places to draw connecting trend, channel, or range lines. Cycles are rough guideposts to help you journey along with the price action.

Every morning, I give you key levels to watch, whether we head north or south. At a minimum, you should always draw these levels on your chart. As a core concept, you should always draw yesterday’s high and low and the overnight high and low on your charts every day. You also want to draw the open for the session as soon as it is available. Traders will take the market to these levels nearly every day and sometimes reverse back and forth until they find the path of least resistance. You monitor for continuation once the path moves forward.

In my case, I day trade from a regular session (RTH) perspective, so those are the levels I plot. However, I want to be aware of the previous day’s high and low if they happen to be outside the regular session range due to the previous day’s Globex (ETH) session. I also monitor the Globex open for the day I am trading. But in addition to the core levels, I will highlight any other levels I believe to be important for the session that day. There are many support and resistance levels in the market, but I prioritize, and so should you.

Next, I want to determine any influence Globex trading might have on the open. How much trading was there above or below the previous day’s settlement? As a side note, the previous day’s settlement and the close are not the same numbers. Settlement is the result of an official exchange algorithm and is more accurate for our purposes. It is available daily here.

If traders are net-long (trading mostly above settlement overnight) or net short (trading mostly below settlement overnight), that can affect the opening as they adjust their inventories and take profits at the NYSE open. This is why the market often turns after its opening direction.

Trading is a business, and market-makers are the wholesalers. There is an axiom that old business is always conducted before new business at the NYSE open. 

I also note where the market will open in reference to the overnight range. There may be a gap higher or lower that could result in an imbalance between buyers and sellers. As with any auction., the market is always trying to find a level that maximizes two-sided trading. Any imbalance, such as a large gap, disturbs the equilibrium. 

The question then becomes, will the higher or lower prices be accepted by traders? Price will gravitate to the level where most traders agree it is fair for that day or not. We generally call this price the Point of Control or POC. In a Volume Profile, it is the highest volume node at price for that day. In a Market Profile, it is where price spent the most time. The POC price levels for both are often the same. More on this below.

I also want to know if any economic reports or events might influence the open or the day. I want to know how any of the previous day’s trading might influence today. For example, the market had a spike rally into the close yesterday (Thursday). That influenced today’s open, as the rally continued to a parabolic climax significantly above the mean on the first opening candle. I could anticipate the price pulling back almost immediately. In the Pre-Market Outlook, I also noted the potential application of Spike Rules and Gap Rules at the open today. You should familiarize yourself with the rules.

Once the market opens, I give it a little time, depending on my strategy for the open as dictated by Globex trading and any applicable trading or set-up rules. This morning, we experienced a small gap open with a parabolic spike candle. The spike turned out to be the second leg of a two-step rally that started into yesterday’s (Thursday) close. As mentioned above, the top of the spike was unsustainably above the mean, and a climax bar (extremely long and vertical) setting up a short trade. Also, we opened with a small gap. Small gaps tend to fill in the first hour.

I took my first short position a few candles after the open and marked it on the chart above. The short trade was clear to me after no follow-through on the climactic opening bar. My target was below where the gap started anticipating a gap fill. My stop was two ticks above the high of the climax bar. Coincidentally, my downside target was the mean and our key line in the sand – yesterday’s high.

Range openings tend to lead to range days, at least for the first part of the day. So I want to rely on my range-day tactics until the price action negates them. I immediately mark the opening price, so I know where it is the rest of the day. The opening price will act as a magnet on a range day. I also want to draw a horizontal line across the high climax open bar for an upside reference. It could be the high of the day and is likely to be the top of the range. Generally, you should be drawing horizontal lines at peaks and troughs throughout the day to reference support and resistance.

After my short trade, the market fell right back to the top of the gap, and I covered the short at the target. After I covered at support, the next two candles spun tails off the support zone established by the candle where I had covered the earlier short. The second candle ran the stops under the first candle I used to cover my short position and tagged the mean. I took a long position from a limit order right at the mean. The two previous candle tails showed strong buying. Also, there was a positive NYSE tick divergence on the buy candle (discussed below). I set a four tick stop.

This new long trade was a low-risk, low-probability trade. I did not have to lose much money to find out if the trade worked. On the other hand, there was no certainty that the trade would work other than the two tails preceding the buy candle and the positive tick divergence. Generally, the more confirmation you have that the market is turning, the higher your risk to stop and vice versa.

As mentioned, however, I use a few other tools that do not appear on the chart above. I will discuss them below. The example I just mentioned is that there were fewer downticks when the price tagged a lower low at the mean on the third buy candle. Fewer downticks indicated that the selling was abating and helped me gain confidence to initiate the long trade from the mean, also an important support zone.

The market subsequently rallied into a rising wedge reversal formation, causing me to sell near the bear breakdown low in the first decline of the morning. Incidentally, on the profile charts, this is where the single prints began. While too complicated to explain in this writing, I know that emotional selling began there. Poorly positioned longs are likely to sell to break even. Also, the wedge, micro double top told me to sell, and the sell was near the top level of what I already expected to be a range day.

To digress just a moment, I now mark the opening range once I had the pivot high and low for the morning. I discuss the opening breach and retreat trade often on these pages. I want to immediately mark the high and low of the range to know when a breach is at hand. I also mark double the range above and below the opening range as targets should the range breach in either direction.

The market then rolls over again from the wedge, double top reversal. It heads right back down to our magnets, the open, mean, and yesterday’s high. I then drew the downtrend line connecting the two-morning peaks. At this point, it looks like we could have a lower high trend reversal at hand, but we are only on our second push down in a potential trading range. Usually, we look for three pushes.

At the second push low, the market stalls at our key reference points once again. Traders then battle it out for a half-hour around the open and mean. If you did not believe that these levels were important, you only have to look at the first chart above. The market forms a micro converging triangle around the open, which puts us in breakout mode. This means that I trade in the direction of the triangle break at its apex.

On the upside breakout, I take another long position for a scalp up to the downtrend line connecting the two-morning peaks and sell at the line. I sell, anticipating a third and final push down.

There is nothing to do after this sell for a bit. The market appears to be forming a larger converging triangle pattern, and we are close to the apex. Triangles are just a form of trading ranges and consolidation patterns. You trade in the direction of the break from the apex, just as we did from the micro triangle.

I took another long trade on the upside break of the larger triangle, with a trailing stop two ticks under the mean.

If the market was going to break back into a bull trend, this is where it would happen. However, after the first strong bull candle, it was clear that limit order traders were dominating the market, which is common on range days.

Unlike trend day tactics which are opposite, limit traders short big bull bars and buy big bear bars. So their presence was clear to me. Regardless, I stuck with my long position looking for three pushes up, just like we had three pushes down, with a trailing stop four ticks under the mean. I could have scalped the wide channel, but for Friday, I preferred the swing approach. It was a personal choice rather than a technical decision.

Given it was a range day, and the bull channel was wide and unimpressive, I sold the peak of the third push and waited. Also, the Friday lunch hour (or two) in New York and Chicago started, so it is usually a good time to quit trading and maybe check in one more time for an afternoon drive or trade into the close.

As the afternoon wore on, the market tried to wedge into the mean and reverse higher, but the wedge failed (a WWSHD) moment, and the market fell below the mean (a bad sign) and right back to the magnets. On a range day, it is typical for the market to return to the open in the afternoon if it does not otherwise break into a bull or bear trend earlier in the day. Also, after a triangle break, the apex may need to be tested for support.

The downdraft accelerated into a climax low on an upper time frame trendline and near the open and support zone. This was a scary moment, as the market threatened to go back into the balance range, and that would not have been a pretty sight.

I took a final long trade from the micro double bottom pivot and pleasantly rode a “V” reversal up into the sell zone at the top of the range. It was late in the day, and I did not have enough time on the clock to be wrong, so I took my profit. The market rolled over one more time, and then there was a brave long trade into the close. That is not my cup of tea, late on a Friday afternoon. Strange things can happen in the last 30-minutes of the session, cleaning your pockets out.

Now, let’s clear the chart of all the notes and see if anything else about Friday’s session becomes clear:

Well, what do you know? Lost in the 5-minute weeds, it is difficult to discern that our trading range was a larger, symmetrical ABC corrective pattern, more often than not a bull flag to go higher. This illustrates the importance of running different screens and views of the market, including an uncluttered, empty chart. You likely will see patterns and price action you might otherwise miss. I never want to miss the big picture.

Additional Tools

Let me introduce you to some additional tools that helped me today and are incredibly useful on range days and even other days. First, take a look at the Volume Weighted Average Price, or VWAP below, with standard deviation bands framing the VWAP (yellow line at the center):

Now, does that seem like it might be a useful tool on a range day? I think so. The VWAP marks the dynamic price center, and the standard deviation bands mark overbought and oversold. The VWAP and standard deviation bands build throughout the day with the data. They may not be useful initially as data builds, though sometimes they can be. However, once the day has some data underneath it, VWAP can be useful for turns from overbought and oversold as the range builds. Some traders fade the outer bands and cover at the VWAP or middle.

Here is another useful tool on range days. Think about it. A range day implies that neither the bulls nor bears are in control, otherwise known as “balance.” The auction has reached equilibrium. We can use Market and Volume Profiles to trade equilibrium:

You often see me refer to the Market and Volume Profiles on these pages. I discuss value area highs and lows and the POC or Point of Control. These tools are presented in the chart above, along with the statistical mid-point of the day’s range.

On the right side of the chart are the profiles. Pointing left in dark blue is the time at price, and to the right in lighter blue and gray is the volume at price. The Points of Control are the yellow/orange horizontal lines marking where the prices spent the most time and had the most volume.

Note that the profiles taper at each end and are wider in the middle. This is characteristic of range days. Highlighted in gray across the price bars is the value area. The value area is where 70% of the volume occurred today, framed by the value area high and low.

Note that the market is overbought when it is above the shaded value area. It is oversold when it dips below the shaded area. I had the privilege of studying Market and Volume Profiles under Jim Dalton, considered one of the foremost experts and a pioneer in the field. It pays to read his books or take his video courses. I also find that Peter Reznicek is terrific at teaching and practically applying the Dalton concepts if you want to learn more.

For now, just note the usefulness of these tools on range days. At the high of the day, only 182 contracts traded on the S&P 500 futures. Buyers dried up above that level. Only 195 contracts traded at the low. Sellers dried up below that level.

As price approaches the top and bottom of the ranges on diminishing volume, that is a clue that the market is getting close to a peak or trough. Contrast the high and low numbers mentioned above with the 42,000 contracts traded at and near the Point of Control and around the middle of the range.

The profiles are actually useful on any day other than a strong trend day. In my day-trading work, I track a profile for each 30-minute candle. A rising value area and POC favor longs, and falling ones favor shorts. When it meanders, you will find yourself in a range day. The granular profiles appear in the chart below. Note the meandering value area and POC during the day. Note how the POC rises toward the close, a positive sign.

The granular profile chart helps me track how the market, POC, and value area develop throughout the day. At some of the lows on the 30-minute bars today, barely 42 contracts traded, a clue that there were no sellers left below that price, and vice versa for buyers at the highs. When I sometimes call out the potential high or low of the day, I am observing this. 

The stacked bars changing from red to green to the right of the profiles analyzes bid and ask trading, a sign of emotional buying and selling. When the bars turn bright red, the candle is peaking. Bright green, and the candle is bottoming, at least for that 30-minute candle.

Let me share one final tool with you, and then you and I can enjoy the rest of our weekend. The tool I want to share is the NYSE Tick, measuring up and downticks (trades in the market). Divergences between price and the tick reading are the keys. I will focus on a couple of points in Friday’s session for illustration purposes::

The highlighted rectangles focus on tick divergences. On the first low of the day and candle, where I took a long position on the mean, you will see that downticks did not confirm the low. That was a clue that the decline was bottoming. On the midday high, the opposite was true. Upticks were not confirming the higher prices. That was a clue that the advance was peaking.

The blue circles highlight another useful tick warning. When you see a new tick high in the session, as highlighted in the first blue circle, those are computer buying programs. A new price high typically follows. Ticks are an advance clue of a potential rally (or decline). At the very least, a new tick high, compared to recent ticks, is telling me that the low was likely in place, and my long trade had a higher probability of success. 

The flip side of that coin is presented in the second blue circle. A new tick low is a warning that sell programs have kicked in, with a decline to come and likely a new price low. It also helps confirm my long exit and/or short trades.

So how do we put all this together? Let me summarize the mid-day sell, somewhat in the same order as the charts above. Key in on the first chart in the sequence, with my notes.

We start the day with the narrative, presumption, and evidence that this will be a range day. Most days are range days of some variety. That is the market “default,” as it were.

I mark the key lines, including yesterday’s RTH high, our line in the sand. I also mark the opening price and stay cognizant of the mean (blue line), the 21-Period EMA. I continually draw horizontal support and resistance lines, as well as trend and channel lines. I plot targets and look for reversal patterns such as wedges, three pushes, double tops, and double bottoms. I expect these to occur when the price gets too far from the mean on either side of it.

Unique to today, the Pre-Market Outlook pointed to further evidence of a potential range day as the NASDAQ 100 was expected to pull the S&P 500 in one direction. In contrast, the Dow Industrials and Russell 2000 were expected to pull it in the other.

There continues to be a battle for leadership between growth and value stocks and small and large-cap stocks. The reopening trade battles the stay-at-home trade. The reflation trade battles the deflation trade. Today, and based on the pre-market July employment report, we anticipate rotation from tech and growth back to cyclicals. This will pull the S&P 500 in both directions, which is likely to support a range day.

With that backdrop and confirmation of the trading range from the price action all morning, let’s take a closer look at the mid-day peak. It will help to have the first chart above handy as I walk through the narrative.

I am long as we approached the peak on a third push higher – often the reversal leg. We were almost to the morning high, a good candidate for the top of the range. We were at the top channel line of the small but wide bull channel. The rising channel was sloppy and choppy, with many limit order traders dominating the market, another sign of range day behavior and a weak bull trend.

The price was tagging the standard deviation VWAP overbought line, and ticks started diminishing as the price moved higher. Price is above the value area high and overbought on per the Market and Volume profiles. Volume is tapering off on the 30-min profile in the third push higher – with only 140 contracts trading at the high. The adjacent 30-minute bid/ask bar lights up bright red, indicating emotional selling and a possible peak, even with the limit order traders in control.

The price even starts a micro, expanding triangle at the top channel line, often a topping sign and the break of which would be a pivot lower. Think of it as a reverse, converging triangle. We are potentially completing a “B” wave in a larger, corrective bull flag pattern. We are passing the mid-point of the intraday hourly cycle. Not shown above, we have a Navigator Algo sell signal and a negative momentum divergence at this peak on the 5-minute chart. I won’t bore you with those charts, as you have enough to digest for this writing.

There is more, and nothing is infallible, but what does the weight of the evidence suggest I do here on a range day? Sell, plain and simple. A short trade might even be appropriate if it was not right before lunch at the Chicago and New York exchanges.

Maybe this is too much information, but that is how I day trade. Those are my tools and my process. 

Moreover, I study overall day trading patterns like flashcards. As you might suspect, patterns repeat because human nature does not change. There are roughly 100 of them. That seems like a lot, but there are a finite number of day trading patterns that repeat. 

You learned your multiplication tables, right? Range days, uptrend days, downtrend days, gap days, etc., have all happened before and will repeat themselves over time. It does not take long to realize what kind of day is unfolding and how to trade it when you know these patterns. 

It is like studying old exams in college because you know the questions will be the same or similar. I had law school final exams that were identical to the past exams. Do you think practicing those exams was an edge? I graduated 9th out of about 160 students in my graduating class, yet few students ever pulled the exams from the library and studied them. Practice makes perfect, as the saying goes.

I use nearly the same process outlined above for higher time-frame swing trading. We will leave that process for another day. Know this – the process is virtually identical in any time frame.

As we began this discussion, the daily, weekly, and monthly charts are a cakewalk if you can successfully trade a five-minute chart. By the way, what is a cakewalk?

Enjoy your weekend and this extensive briefing. I will publish the View from the Top Down Sunday for the macro view. Friday’s breakout from a two-week trading range was unimpressive. Maybe it is just the rotational math, but my guard is up.

A.F. Thornton