Before short timeframe traders begin entering orders this week, I believe we need to take a second and remind ourselves that it's impossible to know what political story is going to hit the wires from one second to the next.
Take Friday's auction, for example. The E-Mini S&P 500 futures (Es) were cruising along just fine, auctioning through the mid-2370s and attempting to gain acceptance around the mid-2380s, when out of nowhere, a story breaks that a high-level White House official has been identified as a "significant person of interest" in the ongoing Russian probe.
This single headline triggered an immediate decline in the Es from approximately 2385 to the 24-hour session volume weighted average price (VWAP) near 2378.50. This may not seem like a meaningful decline, but when you consider the largest day timeframe rotation up to that point had only been 3.5 handles, all of a sudden a 6.5-handle slide gets some attention.
The bottom line is it's both impossible to know when stories are going to break and to what degree the market's even going to care. As short timeframe participants, we need to remain disciplined, logical and stick to things we can actively analyze and trade around. In a nutshell, we need to focus on price.
Let's begin our review of the Es with a daily chart and really focus in on the three most actively traded areas on a year-to-date (YTD) basis.
Friday's auction closed at 2382, which as you can see on the chart above is within close proximity of 2383.75, or our nearest area of heavy volume accumulation on a YTD basis. If we think of 2383.75 as a giant wall, it's a bit easier to understand how it's really difficult to sustain a bid above it, but once we do, it helps to support future attempts to auction price toward 2400.
While some traders will try and fade buyers as price trades into and even above 2383.75, there are those that prefer to trade in the direction of the higher timeframe trend and press their long bets until it's crystal clear a trend reversal has occurred. Neither approach is wrong, as it really is a question of timeframe, risk management and the way you interpret the auction.
The area I really want to hone in on is 2353.25 to 2360; it's shaded in blue on the daily chart above. In my view, the most likely path for the Es over the coming one or two weeks is between approximately 2383.75 and 2353.25 to 2360. If viewed over a higher timeframe, we'd look for larger rotations between the two areas. Then, as price begins to gain acceptance above 2383.75, or beneath 2353.25, we would immediately begin looking for (and trading in the direction of) price extension and short timeframe trend continuation.
The trading begins to get tricky beneath 2353.25, and not only for buyers hoping for a return to 2400. While acceptance beneath 2353.25 would indicate the path of the least resistance is now to the downside, we've already seen demand surge around the YTD VWAP on numerous occasions over the past few months (shaded in yellow).
The way I'd expect to approach a sustained breach of 2353.25 is to trade the Es short toward the YTD VWAP, followed by at least one attempt by buyers to hold the VWAP line. As, or if, price bounced and began to roll back over (beneath the YTD VWAP), I'd expect supply to swell and sellers to turn noticeably more aggressive. From there, we'd likely begin looking for a sustained trend toward 2260.75 to 2262.50, or our currently most actively traded area on a YTD basis.
Worrying about how the market might trade near 2260 is a bit premature. Suffice it to say we'd expect the degree of reaction from that area to be heavily influenced by the path the contract ultimately took to get there in the first place.
Given that the only declines we've seen recently have occurred quickly and with no real trend development, I'd expect a similar sharp decline toward 2260 to be met with heavy demand from higher timeframe buyers. That said, while it's easy for buyers (especially on TV) to say they'd love to buy the market 5% lower, what they do when the market actually gets there is often very different.
Moving on to Monday's Es auction, we'll begin the week with a focus on 2383 to 2384.25. An open above that area that holds and begins pushing higher would be expected to drive on toward 2392.50 to 2393.25. As value builds above 2383 to 2384.25, the risks of upside price extension climb quickly.
Failure sustain a bid above 2383 doesn't immediately doom buyers, but it does encourage two-way rotation between it and 2375.25. Our initial expectation will be for buyers to test the waters in the mid-2370s, but if said tests fail to attract meaningful demand, expect sellers to begin pressing their bets toward 2363.75 to 2364.50. A close under 2363.75 paints a giant target on the low 2350s and the YTD VWAP near 2337.
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.
