Trader's Daily Notebook: All These Ups and Downs Can Get to You

 | Jun 21, 2017 | 7:00 AM EDT
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Tuesday's E-Mini S&P 500 futures auction (Es) certainly didn't go the way bulls would have liked, but let's keep some perspective. Price is still closing above our shorter timeframe moving averages. Moving averages across multiple timeframes continue to trend higher. And despite the lack of momentum at new highs, recent attempts to break the market lower have consistently failed.

Watching the Es trade to new highs one day, only to stall and fall back down the next, is incredibly frustrating. Frankly, in years past (OK, many years past), I would have associated such behavior with a pretty weak market. However, as long as the short and intermediate timeframe trends remain intact, it makes more sense for active participants to stalk reasons to buy the dip than to sell the market short and gamble. This time is different, and a top has finally been established.

Daily S&P 500 Futures Volume Profile

Day timeframe participants have the ability to enter each session with a fairly open mind, and the luxury to pivot based on how price is trading relative to its opening print and developing volume weighted average price (VWAP). Swing traders aren't always so lucky. So if you've chosen to operate over a higher timeframe, it's important to develop the discipline and fortitude to stick with the underlying trend until it's broken. And based on the daily chart above, while momentum and short-term follow-through leave a lot to be desired, price is still holding above all short and intermediate timeframe moving averages.

Trading based on where price is relative to an eight-day, 10-day or 21-day moving average (MA) should be pretty simple, but it's not. Because as price is crashing down through the eight-day MA and approaching the 21-day MA during the day timeframe, things feel pretty bad. Folks on social media and financial TV begin tossing around scary predictions and providing a play-by-play for the location of the Volatility Index (VIX). Suddenly you're in a cold sweat because you believe you're the only dope not loaded with shorts.

Then, a few days go by, prices stabilize and buyers return. The emotions you felt when price was testing, and not yet breaking, those shorter timeframe moving averages have betrayed you. And the bears on financial TV and FinTwit have vanished. One's reliance on emotions, and the biased opinions of others, rather than logic and a sound position and risk management strategy, is generally what causes maximum frustration.

The current advance above our short and intermediate timeframe moving averages will end. And on any given day, supply might finally overwhelm demand. Eventually, rips will be sold with more vigor than dips are bought. Guessing when these events will occur, however, is nearly impossible. So stop trying.

If you're trading the Es or SPDR S&P 500 Trust (SPY) , draw a thick line around 2425, and another just beneath 2420. For now, short-term traders would be expected to pivot toward a bearish trading posture as price closes beneath 2425, and likely ratchet up their intensity as value migrates beneath 2418. Until price and value are under 2425, at a minimum, the odds favor staying bullish or sitting it out on the sidelines.

Moving on to Wednesday's Es auction, we'll begin the day focused on 2437.25. As long as we're trading beneath that figure, sellers have an edge and an opportunity to sell the contract down toward 2431.50 (and close the week's opening gap). Weak demand near 2431.50 paints a target on 2423.75, and that's exactly where we'll expect more aggressive dip buyers to lurk. A session close beneath 2423.75 would likely have us pivoting toward a bearish posture at the start of Thursday's auction.

15-Minute S&P 500 Futures Volume Profile

A sustained trade back above 2437.25 encourages continued buying toward 2442.25, but that's about all I'd expect given Tuesday's decline. Put another way, day timeframe scalpers should be careful chasing price momentum (on the long side) into the low to mid-2440s.

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

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