Jul 132012

Today was about being aware of market context.  We had two reports this morning: PPI at 8:30am EST and Consumer Sentiment at 9:55am EST.  The PPI numbers missed pretty big and the pre-market just seemed to ignore it.  JP Morgan Chase was also releasing their 2nd quarter earnings before the market open.  The media has been focused on JPM for the last week or so about a $2B London trade loss.  There’s been rumors / leaks that the loss was substantially more ($4B to $9B) and it could possibly force JPM into bankruptcy and may be the tip of the iceberg for other institutional banks.  Turns out the loss was ‘only’ $4.4B and JPM beat earnings estimates for the 2nd quarter.  JPM wasn’t failing after all and the institutional bulls came out in force.  The ES moved up nearly 16pts from the 9:30am EST cash open to about 10:07am EST with about one third of the volume institutional.  Obviously there was a lot of upside momentum during that 37 minutes.  It takes a change in trader expectations to create a move like that and changes in trader expectations can create trend days.

The clues for a trend day where there early in the day: the JPM news, ignoring the bad PPI numbers, and quick price movement.  These are the type of days counter-trend traders get run over.  There’s two ways of dealing with potential trend days: ignore them and just trade your plan or try to adjust for the additional momentum by discretionary reading of price movement.  When the market has strong directional momentum, price will either become overextended and just reverse or it will pullback and then retest the previous extreme high or low.  I think of retest as a way of verifying whether or not a top/bottom is in and it gives traders confidence to go in the opposite direction.  I usually refer to this retest as a 2nd push.  In strong momentum markets, I use the 2nd push as my ‘conservative’ way of evaluating whether or not so fade a support or resistance area.  Of course this approach will miss the overextended reversals, but I personally feel more comfortable evaluating the order flow of subsequent pushes rather than guessing where an extreme move will end (or if it will end).

So what happened today?  The DTG 37.50 level was quickly approached after the cash open.  As I posted in the chat room, I wanted to evaluate the 2nd push into the high of the day after the bounce off the R1 pivot.  Once price broke above the R1 pivot, it quickly moved into the DTG 40.50 level.  Thus fading the DTG 37.50 level was easy to avoid.  Price then moved through the DTG 40.50 level to the back edge.  Now 42.50 was structurally a major line in the sand that most of our members would recognize on their volume profile charts.  Price bounced right off 42.50.  Because of the strong upward momentum, on the 2nd push; I wanted either a high failure or a double top.  Any push beyond the high of the day would leave doubt that the top was not in.  Additionally, most traders knew that there were stops parked above 42.50 and a decent retest of the high of the day could trigger them (which I also posted in chat).  If 42.50 was broken, there was a lot of room for price to run to the next resistance area.  The 2nd push into 42.50 went 2 ticks beyond the previous high, thus an interim high could be in; but there’s that lingering doubt until there’s a high failure.  Additionally, the 2 tick probe did not trigger many stops; there should have been a run of at least 3 or 4 ticks.  Thus, this kept me in a wait and see mode as I hoped for another retest of the high.  The wait was not long, price broke through less than 2 minutes later and quickly bounced off the DTG 46.50 level.

The DTG 46.50 level is where price started to display some topping action.  The 2nd push was a high failure which drew me into a short trade.  Unfortunately for me, price never rotated down enough to take some profits and eventually after some grinding, price continued it’s upward trek.  In retrospect, there was one more clue to the trend day; every 6PF down rotation was a higher low.

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