Pre-Market Outlook – 6/3/2021

Pre-Market Outlook – 6/3/2021

Yesterday was classic WWSHD and, as Peter Reznick over at ShadowTrader.net calls it – “Door #3 action. 

As to Door #3, the reference is about sideways rather than trending up or down action (Doors #1 and #2). Yesterday, we tested both of our key levels that should have brought about change (4215 on the upside and 4198 on the downside), and they didn’t. As to WWSHD, buyers should be frustrated as they had some acceptance over the start of the single print area at 4210, which fizzled.

What bothers me is that as we approach the top of the range, it feels like my grandmother slapping my hands when she caught me in the cookie jar. The selling has been aggressive at the top of the range all week, leaving us with so-called “b” market profiles. 

A “b” profile looks like the alphabet letter, where time spent, and volume is thin along the upper stem, indicating very aggressive sellers up the line. The shape is wide at the bottom, where all the rotation action settles. 

The belief is that longs are trapped, still trying to exit the market – but they need to be quick at the higher prices. While not a hard and fast rule, “b” profiles tend to appear at the end of uptrends, so carry that forward in your narrative.

Tuesday and Wednesday's S&P 500 Volume and Market Profiles with the Daily Candle Alongside - Both are Examples of "b" Profiles, with Tuesday's (the first) Profiles Being the Best Example

The 5-day EMA held the line yesterday – though just barely. So we were still in the game with the Navigator swing strategy. Unexpectedly, the Asians took us right back to the top of the range in Globex last night.

The Plot Thickens

I wrote all of the above last night before Europe opened, as I usually put my initial thoughts down early in the evening, then update them about 30-minutes before the New York open. I would have added that the Fed was jawboning the market down again yesterday – indicating that they were getting ready to taper bond purchases – or quantitative easing as it has come to be known. That put a negative quell on the market mid-day.  It is axiomatic that the Fed still holds the keys to this market uptrend.

Now we can add that the Europeans came into the markets in a sour mood. New York has followed suit pre-market. So the roll-down to 4173.50 per the “look above and fail” in our balance rules on Tuesday is now complete. 

Unfortunately, this price action has tripped our 5-day EMA stop on the Navigator Swing Strategy at 4190, and the Algo sell signal on a negative momentum divergence. A volatility squeeze that is now firing short could easily magnify the downside. It likely will make sense for the active trader to short rallies instead of buying dips from here. 

I need to mention that technically, the Algo signals are not valid until today’s candle is complete. Still, it would take a dramatic recovery in the candle to invalidate the signal. It has happened before, but it is not the most probable outcome. We have to make our decisions on probabilities, not certainty. My bias is not constructive, even though I do my best to be objective. 

For today’s trading plan, overnight inventory is nearly 100% short this morning, The S&P 500 will open with a true gap down right into the 21-day line, and I would expect overnight traders to buy on the open to take profits on their short positions. Of course, gap rules apply this morning, focusing on #2 and #4.

Unlike when the profile structure is repairing, the rotation to the low end of balance can be completed in an overnight session. We can already see buyers stepping in at that level as prices just below it were rejected recently – and we also see some positive reaction to the unemployment numbers this morning. Early trade, then, could be tricky.

Regardless of whether there is a fade or not, assume that there is overhead supply from the larger balance area above us. That means traders can sell counter-trend rallies towards yesterday’s low around 4195 given the correct corresponding context.

Should the opening drive be lower and acceptance found below the overnight low, look towards the Weekly Expected Move low at 4153 for support. That should be the worst case for the week. 

Beyond the WEM low is the 4120 balance area low. The uptrend and 50-day lines also converge there. Falling through 4120, then, would confirm that the 18-month cycle correction is underway.

While I expect a bounce at the open, I think cash is the best place to be for now, unless you want to shift gears and short rallies.

AF Thornton

Website: https://tradingarchimedes.com

A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.

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