Let’s start with the 2-hour candle chart above. I have been using a 2-hour chart as my master chart for day trading lately. I will change that from time to time, but it is working well for now. In this chart, I define the neighborhood where the market will hang out this week. You know what they say. You need to know your neighborhood, and trading is no different.
What is nice is that the neighborhood (highlighted in gray above) is defined by the Weekly Expected Move. There is a 70% probability of staying within the Weekly Expected Move range each week. In fact, multiple billions are betting that price will stay inside this range. Also, each week, there is a high probability that the price will tag one end of the range. Once you have established the week’s direction, the corresponding end of the move is your ultimate target.
I will always do my best to help you prioritize the support and resistance you will encounter each day. In so doing, I look at the market from two perspectives. First, we have the traditional chart perspective as outlined in the normal price chart above. Second, we will look at the market/volume profile perspective, which measures volume and time at a price.
In creating your chart, then, start by calculating the Weekly Expected Move and drawing it in. Then, using monthly, weekly and daily charts, draw in any major support or resistance that you will encounter in the range. I usually market these on the right with an “M,” “W,” or “D.” Also, look for important moving averages you may encounter in the week’s range from the monthly, weekly, and daily charts.
Normally, you will contend merely with the 5-day line from the daily chart. In a larger correction (such as the one unfolding now), you may encounter the daily 21, daily 50, and weekly 21.
I draw or program all of this into my 2-hour chart. As stated above, I like my 2-hour chart to at least be readable. Even if it appears cluttered at first, I can step down to a 5 or 15-minute trading chart which will be uncluttered but have all the relevant lines I need to day trade.
Also, recall from our discussion last week, you always want to paint yesterday’s high and low and the overnight high and low (if you are trading the futures chart). Initially, traders will move the market towards these key levels to test strength or weakness for direction. You can pivot at one of these levels or breakthrough it as the case may be. Breaks can be fake-outs – so monitoring for acceptance and continuation at the new levels is important. Often, you are applying one or more of the setup rules I point out pre-market.
Today’s Plan – Micro Narrative
This morning, the market will open with overnight inventory balanced and prices in the upper 1/3 of Friday’s range. Having said that, overnight range expanded Friday’s range lower overnight, so carry that forward today as well. About half of the overnight trading is above and half below Friday’s settlement. In such cases, nothing tips us as to the market’s initial direction. Accordingly, I will mark the top and bottom of the first 30-minutes and take a trade in the direction of the first breakout, but only after the market pulls back from the initial breakout. I look for a price pivot on the pullback. A good target, assuming nothing else is in the way, is double the range. This is not easy and can be tricky at times. The market can change direction several times before it settles down. Usually, by 10:30 am EST, there is a 70% probability that the high or low of the day has been established.
Overnight we have somewhat of a “V” bottom. That leaves the potential for a reversal pattern to go higher. All of Friday’s identified “support” levels will now act as resistance if the market attempts to go higher. If the market can take out the overnight high at 4177.50, I would target the former breakdown low around 4185.50, all the way up to the 21-day and downtrend line from the top, which both congregate around 4200. Be cognizant, though, that the market could not punch through the 50-day line on Friday, which is about the same level as the overnight high at 4177.50. That level could act as a magnet or center line to prices today, but that is a wild guess.
On the downside, target Friday’s settlement at 4151.25, also the overnight halfback. Then focus on the overnight low at 4126.75.
As stated before, the default direction of the market every day is sideways or rangebound once a range is established. Market internals can help you determine this. Mixed internals usually mean rangebound or what we call “responsive” trading. You buy and/or short when you get to the end of the daily range and pivot. The safest trade is to get out at the middle of the range. That is where running a daily Volume Weighted Average Price (VWAP) line can be helpful. It gives you the middle in rangebound conditions. You can run standard deviation bands on the indicator to help identify the range boundaries.
I have highlighted the WEM range in the gray box above. So if you see the gray highlight in a 5-minute chart later today, you will know what it is. As a side note, the safest calculation for the WEM is the hand calculation on the SPX Cash Index. The cash index is also the best place to calculate your support and resistance. There is a lot of premium in the new September futures contract – so the cash index levels will not correspond well to the futures. It turns out that the SPX cash index actually did pound against the expected move on Friday, before the index rolled over. I missed that occurrence in the cash index because I was not allowing for the extra premium in the new futures contract.
I will publish a quick primer on determining a price turn with some precision later this week. It is unwise to put on trades simply because you are at support or resistance. There is a method to confirm a turn. Once you know it, you can watch the price to determine its probability of pivoting before you commit to the move. And as stated before, some support and resistance are more important than others. Usually, that will be where multiple support and resistance zones congregate.
Last week’s decline from the Fed meeting is impulsive and has exceeded the typical, symmetrical a-b-c wave. The “c” portion of the wave extended, increasing the probability that the market’s top is in. The market ended Friday very oversold on the intraday charts, so a bounce this morning is not surprising. However, the S&P 500 index is not yet oversold on the daily charts, so caution is warranted for longs.
Good luck today. I don’t trade Mondays typically, as I often state. Weird behavior often follows weekends, as it follows a Friday of quadruple witching expiration.
My fingers are tired from typing anyway this morning. The next update will come out about Noon EST. Have a great trading day.
A.F. Thornton