Context … Context … Context
After a week of vacation I am back.
Today Crude oil futures opened above the day and week balance high so the gap rule as well as the breakout rule were in effect.
The early opportunity was to go long with the gap and the balance breakout as we traded near the balance high at 51.11 and traded back up through the open at 51.16. Buying above 51.16 with a stop below 51.11 ( the balance high ) was a good risk – reward trade off.
In D period we left a poor high leaving day traders and overnight inventory very long at the high. We also traded at the POC for the fourth times making it prominent intraday and lowering somewhat the odds for the up trend continuation.
Remember lowering the odds of trend continuation does’t mean that the trend is over. We as humans are not programmed to think in terms of odds. The market was still accepting the gap as well as the balance breakout and the one time framing up was still intact. These are major bullish contextual factors. Taking profit on part of the position could still be a good strategy but the odds were still largely in favor of long positions. At least the breaking of the one time framing was in order before ending the up trend scenario.
E broke the intraday high and confirmed the day and week balance breakout with good volume. Probably new money accompanied by some short covering coming from the day traders as well as short term traders from the balance area pushed the market to new heights.
One time framing up was never broken for the whole day as this breakout brought more and more trader’s attention.
A few lessons to be learned today :
- Weak buying
We saw a lot of weak buying specially in the few hours around the open. Weak buying doesn’t mean look for short. As long as there are no strong selling , weak buyers can bring markets to extreme higher than you can ever imagine.
Never forget about the context. Gap and Balance breakout ( day and week ) are major signals of change in thinking. In these situations very often inventories take the back seat.
- Odds thinking
To figure out odds we must consider and weight multiple factors. Intraday prominency as well as weak buying and inventories had to be weighted against balance break out, gap as well as one time framing up and the absence of strong selling. The odds were definitively on the long side.
That’s the way we as traders have to think to be successful.
Good Trading !