Trader's Daily Notebook: This Was a Mental Beat-Down

 | Apr 18, 2017 | 7:00 AM EDT
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Stock quotes in this article:

spy

,

IWM

The general consensus at the end of Monday's auction was traders were caught offsides and forced to cover their short bets as the major indices squeezed higher into the regular-session close. This may be true. I really don't know. But frankly, it's not something I'd waste time worrying about, as it's nearly impossible to implement such ideas and theories into one's trading or risk-management strategy. 

What I do know, however, is Monday's trading was incredibly difficult. But perhaps only in a way recognizable to active traders. Given Friday's bearish close, I believe a majority of active participants were waiting for a reason to get short. I said as much around midday Monday, when I tweeted that it felt like every trader on the planet was sitting on their hands, just waiting to get short. 

So what went wrong? 

I noticed plenty of traders grumbling over Monday's volume levels. And with good reason, as they were pretty atrocious. The SPDR S&P 500 ETF (SPY) was the most active of the three ETFs on my screen, but it still traded less than 80% of its daily average. The iShares Russell 2000 ETF (IWM) was the quietest of the group, with daily volume coming in at an astonishingly low 56% of its daily average over the past month. But as we all know, gains made on low volume are just as bankable as those achieved on high volume. Put another way, don't let volume become a daily excuse. 

What made Monday's auction particularly tough, at least for me, is that Friday's auction ended in a very bearish manner, and yet the E-Mini S&P 500 futures (Es) closed only three five-minute bars beneath Monday's developing volume weighted average price (VWAP), and only two bars beneath the session's opening print. Traders looking for a reason to get short, folks like me, were left staring at a quietly rising contract that refused to test VWAP, let alone break beneath it. 

The bottom line is I found Monday's auction to be more of a mental beat-down than anything else. While recognizing that the contract's ability to remain above the session VWAP should have kept traders from pressing a short bias (or at least pressing it in an overly aggressive manner), the fact that traders continued to auction prices higher and higher, through each logical resistance level we entered the session focusing on, was a cross between perplexing and downright frustrating. 

Daily S&P 500 Futures Volume Profile

While I believe the shorter timeframe trend is still bearish, I suspect Monday's rally from the year-to-date (YTD) VWAP and close above the 50-day exponential moving average (EMA) will have once-cautious buyers entering Tuesday's auction with a rosier set of glasses. 

Moving on to Tuesday's Es auction, we'll begin the day with primary focus on Monday's intraday high of 2346. An early push above that level likely triggers some back-and-forth between there and 2348. But ultimately, as price gains acceptance above 2346, our next most probable push will be toward 2353.25 and 2360. Assuming buyers remain active above 2346, those looking to fade any rally should consider using 2360 as a natural area to measure risk against.

15-Minute S&P 500 Futures Volume Profile

The best setup for those looking to sell short would be an open in and around the mid-2340s that promptly pushes above 2346, but is then hammered back beneath the session's developing VWAP and opening print. Such a scenario would have us looking for a slide toward 2341, with possible continuation toward 2337 and 2328.75. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my Twitter feed @ByrneRWS 

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