How many of you tried to sell the market today at the open ?
I am sure that was behind a lot of traders’ mind this morning.
- The market seemed to be overbought.
- Inventory was long.
- Yesterday’s profile structure wasn’t strong at all.
But you can’t short the market blindly based on these facts. That has to be part of the whole context. As I said many times before weak traders can bring markets to extreme.
Now let’s look at the other side of the coin.
- Yesterday we broke a 3 day balance. Breaking a balance means very often the start of a new auction.
- Market opened on a big gap right at the high of the overnight market. Usually big gaps are not easily filled on the first day as we can have margin calls on those caught on the wrong side of the gap.
- Finally the market never tried to fill the gap from the open and started building value higher and above overnight high.
So the gap rules were in play at the open. One of the rule says that if we don’t fill the gap pretty quickly go with the gap.
We never had an auction against the gap and started building value at the 49.97 level. The odds were on the long side. The target for this move was the 8 Week and 3 Month balance high at 50.44. This level was considered as being strong because of the longer time frame nature of this reference.
After reaching destination I suspect that we saw some strong hands selling bringing back the short term long inventory and the new long inventory from day trader as well as weak structure of past days into the whole picture. We left a pretty good high with a 9 ticks tail.
The ensuing down move from D high was showing weak selling though and weak hands got “too short” leaving a poor low at I low.
Take note of the P volume formation for the J period rally from Pro Suite Market Profile chart ( second volume profile ladder on the left ).
The I low was not a secure one and the market presented a good selling opportunity near the H period high.
This day is a very nice example of the price “mirage”. Traders following price would have bought all afternoon following the huge morning rally. A deep understanding of the context would have given another perspective.
We did not finish the day on a strong note after reaching the destination at 50.44.
One critical level I will be watching tomorrow is the afternoon rally high at 50.12. Acceptance below that level would signal no change with the afternoon negative mood and acceptance above it would keep this bull move intact.
We will have to monitor the overnight inventory as well. The low is poor but not related to short term inventory. We will need to break that low before even considering a possible short term balance or reversal.
Good trading !