The Market ProfileA way of reading the market that recognizes either time spent or volume traded at a particular price level. A market profile can be either made up of “TPO’s” (time price opportunities), or volume. TPO’s measure how much time was spent at a particular price, while volume-based market profiles measure how much volume traded at a particular price. Generally, market profile is used in the trading of futures, especially the /ES. ShadowTrader utilizes volume based profiles. value areas and ShadowTrader Pivots for /ESZ21 and /NQZ21 Futures are posted free every morning in the ShadowTrader Swing Trader newsletter.
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Click HERE for a market profile key that will help you interpret the chart above.
Pre market indications
| Opening In/Out Balance | out of balance |
|---|---|
| Overnight InventoryA way of measuring overnight activity in the futures market by just noting how much of the overnight activity happens to fall above the prior day's settlement value (4:15pm EST close) and how much falls below. If more activity is above the settlement, then overnight inventory is said to be net long. If more is below, then it is said to be net short. If all of the overnight activity is above the settlement, then it is said to be 100% net long. If all of the activity is below the settlement then it is said to be 100% net short. The overnight inventory situation matters most and has the most impact on early trade when it is skewed 100% in either direction because when the imbalance is very large like that then the odds of an early correction increase greatly. This is due to the fact that most... | 100% net shortThe concept of being more short than long in an options spread by creating options spreads where you are selling more structures than you are buying or selling wider structures than the ones you are buying. Example would be a broken wing butterfly. This spread is made up of two structures, one long vertical and one short vertical. In the BWB, the short vertical is wider than the long vertical. When you are long this spread, you are said to be in an options position that is "net short" |
| Current Price/Overnight Range | lower third |
| Shock and AweA term Peter uses to describe what overnight futures traders may be feeling when faced with an open that is wildly divergent from what they expected. Large gaps in either direction that are opening well outside of range are examples of this. The approach is that when the market opens in such a manner, there is often opportunity to trade earlier rather than later because of the large contingent of traders who will be forced to reverse their positions quickly. | yes |
| Potential for Early Trade | yes |
| Short Term Bias | bearish, /ES now well below daily 20/50 sma’s |
Key Levels for Today
| 4411.50 | RTHRegular Trading Hours. In the /ES this means the price action from 9:30am EST to 4:15pm EST only. Low |
|---|---|
| 4379.25 | Overnight HalfbackA term for the halfway point between the high and low of any session, could be a day session or an overnight session. On Peter's market profile charts it is always a dark yellow horizontal line at that level. |
| 4339.75 | Swing Low 8.19 |
| 4340.00 | ONLOvernight Low. A term mostly used for the futures market as it trades almost around the clock. To be precise, in the /ES this would be the lowest price between 4:30pm EST and 9:30am EST the next day. |
Ongoing Narrative / Commentary
Purposely picked something unhealthy and sugary for the breakfast image this morning, thinking that some out there might need the comfort food given the implied open of -81 and still falling as I got to press. Rest assured that the picture will be the only thing sugar coated in this commentary.
Enormous true gapThere is a lot of discussion as to what constitutes a gap. Is it measured to the prior day's close, or to the prior day's high or low. Here at ShadowTrader we believe that it is always and only to a prior day's high or low, thus creating a true gap or space on the chart between one day and the next. Thus a true gap is one that has price opening completely outside of the prior day's range (either above the high or below the low) and anything else is just a gap that has far less import. As a gap is a "reordering of thinking", only a true gap really changes the tone and creates opportunity to trade early rather than later. lower on overnight inventoryA way of measuring overnight activity in the futures market by just noting how much of the overnight activity happens to fall above the prior day's settlement value (4:15pm EST close) and how much falls below. If more activity is above the settlement, then overnight inventory is said to be net long. If more is below, then it is said to be net short. If all of the overnight activity is above the settlement, then it is said to be 100% net long. If all of the activity is below the settlement then it is said to be 100% net short. The overnight inventory situation matters most and has the most impact on early trade when it is skewed 100% in either direction because when the imbalance is very large like that then the odds of an early correction increase greatly. This is due to the fact that most... that is 100% net shortThe concept of being more short than long in an options spread by creating options spreads where you are selling more structures than you are buying or selling wider structures than the ones you are buying. Example would be a broken wing butterfly. This spread is made up of two structures, one long vertical and one short vertical. In the BWB, the short vertical is wider than the long vertical. When you are long this spread, you are said to be in an options position that is "net short"
puts gap rulesGuidelines to follow on any day that the futures open outside of the prior day's RTH range. Only opening outside of range is a true gap and puts gap rules in play. 1. Go with all gaps that don't fill right away. This means that if early trade doesn't start to correct the imbalance, then prices will probably move in the direction of the gap. 2. Larger gaps can often fail to fill on the first day or may fill only partially. 3. If the gap fills (meaning the prior day's RTH high is touched on a gap up or the prior day's RTH low is touched on a gap down) and value cannot get to at least overlapping, then the odds of a late day rally (on a gap up) or late day selloff (on a gap down) increase. 4. Gaps of larger than $20 in the /ES are difficult to trade and should be avoided early in the day as t... firmly in play. For those who lean more to the day timeframe as their modus operandi, remember that the size of the gap is commensurate with the difficulty of pulling off an early trade. The opportunity is there but it’s not easy.
Everything in the morning session will be about the gap fill or lack thereof. With anything this large, we would expect at least some counter balancing of the overnight move. The usual strategies outlined in the Scenarios below can be executed.
From a purely technical standpoint, the open will have us well below the 50sma daily which the SPX barely held on Friday and also well below trend. Proximate technical support is minimal. I’ve listed one that could be noteworthy today which is the swing low from August 19th on the /ES daily. For now, this level has held as the ONLOvernight Low. A term mostly used for the futures market as it trades almost around the clock. To be precise, in the /ES this would be the lowest price between 4:30pm EST and 9:30am EST the next day. is almost dead on it.
I’ll be going over where the cash charts are slated to open in relation to their longer term charts in the Pro Trading Rooms of both Weekly Options Advisory and Time Spreads.
Scenarios
- Gap rulesGuidelines to follow on any day that the futures open outside of the prior day's RTH range. Only opening outside of range is a true gap and puts gap rules in play. 1. Go with all gaps that don't fill right away. This means that if early trade doesn't start to correct the imbalance, then prices will probably move in the direction of the gap. 2. Larger gaps can often fail to fill on the first day or may fill only partially. 3. If the gap fills (meaning the prior day's RTH high is touched on a gap up or the prior day's RTH low is touched on a gap down) and value cannot get to at least overlapping, then the odds of a late day rally (on a gap up) or late day selloff (on a gap down) increase. 4. Gaps of larger than $20 in the /ES are difficult to trade and should be avoided early in the day as t... apply. Get familiar with them if you are not. They are important and they work.
- Assume that there is potential for early fadeWhen a stock moves opposite the direction of its gap on an intraday basis. Buy the high of the first one minute bar, or if the opening drive is lower, buy the cross back up through the open. Monitor for continuation with an ultimate target of the Overnight HalfbackA term for the halfway point between the high and low of any session, could be a day session or an overnight session. On Peter's market profile charts it is always a dark yellow horizontal line at that level..
- An early short entry assuming a gap and go is usually difficult to pull off. The better move would be to short the cross back down through the open if there is an initial fadeWhen a stock moves opposite the direction of its gap on an intraday basis or strike an up trend line from the LODLow of Day to any higher low that forms and short the break of that line. Target the LODLow of Day first and monitor for continuation lower.
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