Trader's Daily Notebook: A Different Kind of Trump Bump

 | Aug 09, 2017 | 7:00 AM EDT
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If Monday's E-Mini S&P 500 futures (Es) auction was the epitome of sleepy summertime trading, Tuesday's auction was its polar opposite. And it looks like we have President Trump to thank for this bump in volume and volatility.

Tuesday's Es volume came in around 1.25 million contracts, or a bit more than 2.5 times Monday's figure. The regular session's intraday range, which came in at 21 handles, was four times larger than Monday's. Suffice it to say these are welcome changes for the day timeframe scalper.

The session started out relatively slow, with the Es opening beneath our 2475 pivot. After the lower open failed to attract additional supply, traders bid the contract back above our pivot and quickly drove prices to new contract highs. Day timeframe participants began hitting bids as price held above the opening print, our 2475 pivot and the developing volume weighted average price (VWAP). Until noon ET, it looked like the morning's bullish price extension was here to stay.

The bullish session came to an abrupt end when President Trump informed reporters North Korea would be met with "fire and fury like the world has never seen" if it continued to threaten the U.S. And this clearly wasn't what traders buying stocks at all-time highs wanted to hear.

We obviously need to consider whether Tuesday's break above 2480 and subsequent collapse constitute a failed breakout. If you review the daily chart below, it's easy to see price settled back beneath the composite value area high (VAH) discussed in Tuesday's note.

Daily S&P 500 Futures Volume Profile
 

If we view Tuesday's rally and subsequent decline over a four-hour timeframe, it seems logical to expect price to test the other side (or lower end) of our most recent consolidation zone. Based on this, my expectation would be for an immediate test of 2461 to 2463 should we enter Wednesday's auction and find the Es offered beneath 2468.50 (the purple line on the chart below).

4-Hour S&P 500 Futures Volume Profile
 

As far as whether Tuesday's decline constitutes a failed breakout, I would say yes, it does. However, I wouldn't want to begin betting on short-term bearish price extension without first seeing a close beneath the 20-day moving average (MA).

The bottom line is breakout buyers paid a heavy price for chasing the Es through 2480 and into uncharted territory. Whether Tuesday's reversal is the beginning of a more meaningful decline, or simply another opportunity for equity dip buyers and volatility short-sellers, will likely come down to how strong demand is beneath the 20-day MA (roughly 2468.50). If buyers emerge under 2468.50, perhaps we'll continue to churn for a few days while momentum builds for another run at new highs. If, on the other hand, value migrates beneath the 20-day MA, we might finally see some sustained volatility and set our sights on the 50-day MA and return toward 2400.

Moving on to Wednesday's Es auction, we'll begin the session by using 2468.50 as our day timeframe pivot. A bearish opening beneath that figure immediately shifts our focus toward 2461.25 to 2463.25. If dip buyers are going to make a stand, preventing a close beneath the 20-day MA, they'll need to do it from here. A rebound back above 2468.50, provided the low 2460s are tested, would be a major victory for responsive buyers.

15-Minute S&P 500 Futures Volume Profile
 

A failed trade from the low 2460s opens the floodgates and allows the sell orders to flow freely. Incremental support is to be expected around 2452.25, but I wouldn't expect an aggressive buyer to re-enter the pit until closer to 2443.50 to 2445.50.

The day timeframe scenario most likely to lull the greatest number of traders to sleep would be an open above 2468.50 that simply rotates between that and 2477.75. All trading between these two levels is best left to those willing to scalp for a couple of handles here and there.

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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