The Micro Narrative

Yesterday’s intraday breakout to new highs failed and qualifies for a “look above balance and fail” per balance rules. A visit to 4205 is forecast, but there may be a few stumbling blocks on the way.

Ultimately, the price finished in the middle of yesterday’s candle, resolving nothing in terms of our recent balance range. Globex trading leaves a very small candle in the middle of yesterday’s candle. We switched to the September contract on the futures at the end of the day, and that might have some brief impact on pricing but I cannot quantify it. 

Additionally, the S&P 500 gapped down when the Globex futures market opened last night, an unusually negative opening of late. This could be associated with the contract change as well. Globex trading is inside yesterday’s range, forecasting even more balancing. The market spent a lot of time and has a very wide TPO (where price spent the most time) around 4230 overnight, near the top of the balancing range. Inventory is 100% long, so there may be some normal profit taking at the open – old business before new business.

All in all, the market appears tired, but is also challenged by the math between and among the positive and negative sectors. My concern here is that the narrowing spreads between two and ten year rates is unhelpful to bank profits, which threw cold water on financial stocks yesterday. 

By mid-day, leadership surrendered to more defensive sectors, though tech stocks positively reacted to lower rates, as the 10-year Treasury rate tucked below 1.5%. Financial stocks could take the rest of the market down with them, if the negative trend continues.

Our General Day Trading Plan

Our plan always starts with knowing our neighborhood. We need to map all key levels and trendlines we are likely to encounter today.

From there, we have to prioritize those levels we expect to be the true inflection points so that we don’t end up hopelessly confused. Some lines and levels are more important than others. It would help if you similarly mapped any instrument you trade.

I rarely trade Fridays due to options expiration, but today the S&P 500 and NASDAQ 100 will not skirt the edges of their expected moves unless an extensive range manifests. So the usual distortions are inapplicable and I will be trading.

We always start with identifying our quartet levels – yesterday’s high and low, and the overnight high and low. The market typically starts in one direction, then reverses, and sometimes reverses again. There is a 70% probability that price generally will establish the high or low of the day by the end of the first hour of trading. We keep this in mind.

We monitor each of the four levels for support or resistance, as the case may be and as the market picks its direction. If the market breaks a level, we monitor for continuation and move to our next target. That is the basic strategy.

Yesterday’s high and low are 4249 and 4207, respectively. In this writing, the overnight high and low were 4238.50 and 4225.25, respectively.

We augment the quartet with any other important levels we may encounter in the neighborhood. Today, we need to be cognizant of the 5-day EMA trading around 4227 on the September futures contract. We also find the Navigator Algo trigger at the same level. Too much time, or a close below that level, would tip the hat in favor of sellers.

It likely is no accident that the market spent a lot of time at 4227 overnight, as that is also where a very wide TPO and VPOC (volume point of control) lies. Wide TPOs can interrupt price direction.

Below that, we have the wedge uptrend line around the 4215 area (our old balance area high). From there, support lies at yesterday’s 4207 low, just above the 4205 balance low forecast by the “look above and fail” per the balance rules.

We also monitor how the market reacts to the VWAP (volume-weighted average price throughout the day). Long trades generally work better above the VWAP and short trades below the VWAP.

There is nothing but blue sky above yesterday’s high at 3249. But the top wedge line will provide resistance at 4266 or so.

We also monitor internals to determine whether the market is more likely to trend or move sideways. Mixed internals generally send the market sideways, and the best trades are “responsive,” meaning you respond to the range boundaries, long or short, as the case may be.

Exceptionally strong or weak internals, the exception to the rule, cause the market to trend in the direction of the internals. In other words, sideways is the default trading stance as most days are non-trending.

In responsive trading, you can also go long or short to the VWAP or 21-EMA (on a 5-minute chart) from the VWAP standard deviation lines or the day’s value area high and low.

I will continue to expand and document this strategy for day traders with checklists and rules.

We don’t have a lot to go on at the open today. As a trader, I would be quite disappointed had I bought yesterday’s failed breakout. There may be such traders looking to get out today.

This morning, it will pay to monitor the first 30-minute bar. Wherever the range breaks, look to get positioned in that direction on the market’s first pullback to the 30-minute range. That is one way to approach the day.

Good luck today.

A.F. Thornton

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