4-Day balance and gap opening…
At the open we had the following contextual factors :
- Gap down ( 51.28 )
- 3-Day balance ( 51.28 balance low )
- Overnight inventory short
- Prominent POC from yesterday
- Weak market based on yesterday’s profile
- Overnight inventory pivot at 51.08
- Two consecutive poor high from yesterday and two days ago profiles.
Let’s analyse the “A” period.
We opened and traded immediately with strong conviction on the down side. The down move was not strong enough though and the market reversed back and traded through the open again. The rejection of the low was a clue that the market was not ready to break the 4-Day balance yet and volume was lower than yesterday for the same period. Furthermore overnight short inventory was being challenged as we were trading well above the overnight inventory pivot at 51.08.
Overnight inventory pressure as well as rejection of the low, weak volume and weak market based on yesterday’s profile and two previous poor highs turned me bullish. That’s how we calculate odds. I must admit that I missed the move down in “A” from the high down to 51.14 just before the open of “B” period. My buy order was resting at the 51.10 level.
Mistake right !
Anything below 51.20 was a strong buy based on the previous analysis. Target should be yesterday’s prominent POC at 51.59.
Very often short covering rally attracts more buying specially when we trade at the bottom of a day balance. That’s what we have witnessed.
Furthermore volume analysis showed that “B” and “C” periods brought high volume telling us that short covering was probably accompanied with new money
Think about the second and third gap rule :
- If the gap is filled and value cannot at least become unchanged, relative to
the prior day, a later day move in the direction of the gap has higher odds of
occurring. This is more easily recognized when you have internalized the
concept of trading value rather than price.
- If the gap is filled, the initial destination trade becomes the high or low of the
previous pit session depending if it is a downside gap or an upside gap.
If you merge the rules together and because developing value was developing lower we could expect the following :
Good selling opportunity could present itself around yesterday’s high at 51.90 for a move on the direction of the gap. We traded at 51.81.
In “F” period we had 4 TPOs across making – for this period only – the intraday POC prominent.
I was then expecting a possible long liquidation for these day traders that bought at the top confirming the first gap rule above. Anything around the day balance low at 51.28 was a good buying opportunity with a small stop. Always think in terms of odds and risk-reward.
Keep in mind though that developing value was lower today but the context was somewhat neutralizing lower value as we re-entered the 3-Day balance.
Good Trading !