Mar 152018
 

Ah yes, a perfect ‘anatomy of a market maker initiated stop run play’ example followed by the post flush bounce yesterday for your perusal. To get the most out of these types of examples in particular I strongly suggest running these back in live data replay in your charting programs if you have the means. And as always be sure to go back and read the chat transcript for the day if you weren’t in the room. It’s critical to get a sense of context as it relates to the process of pre-planning areas to stalk prospective price action activity well ahead of time. As you will note yesterday, the OL/YL 62’s were earmarked and discussed well ahead of time but as always completely non-predictively. “IF price gets to here and X happens, since I have THIS context and bias opinion I’d like to express, I’ll look to do THIS…”. Always the same mental process for most members based on noting key market structures well ahead of time in context and their likelihood of drawing increased interest from BOTH buyers and sellers. In other words, anticipated liquidity in a relatively narrow range…

As I said in the room there was no doubt this line was going to attract the crowds across a wide range of time horizon objectives, buyers and sellers alike. This line turned out to be especially important as of the time of this image snap because as it turned out, the first test respected it very tightly putting in a low just two ticks below the case price on the far left. This was suspect in this case as it always would be for such a major line in the sand likely seen by the vast majority of participants as being super important. Would the S&P let new intraday buyers enter long right at that edge and get away with it without being put to the test with any heat? Would longer term longs from earlier sessions also get away with it with their wider stops well out of the way a few handles behind this line in the sand? My answer if I were stalking action in that area would tend to be a resounding “NO” to both questions, hence the potential trade idea for those executing strategies seeking to profit from what we call those ‘market maker initiated stop run plays’.

The concept is fairly simple. Armed with the knowledge and a hypothesis as to the likely answers to the above questions, top of book market makers will often pull liquidity on one side to see if they can get price over such lines in the sand in an attempt to force out the weaker hands in question – in this case prior longs. The panic selling into the limited liquidity often creates big bursts of motion which momentum shorts hop on and then those momentum scalpers are also those taking the other side to get flat with a profit of said prior longs stopping or puking out at a loss. Poetry in motion and business as usual in the S&P. So here we see the characteristic paper thin relative prints in yellow especially on the offer side which was a direct result of the above plan set into action. Just below the yellow box, though unmarked, you see the prints start to get thicker, likely from the shortest term day trader longs throwing in the towel roughly one point behind the case line. Stops one handle behind a swing line. Hmmmm…(wink). Right where ‘they’ say you’re supposed to put them. lol. And below that but a bit further behind the case line (where one might think they would be “safe”, we saw the really big action take place in purple as the longer term prior longs joined the party and also threw in the towel. So there lies the first possible op from this area we discussed being the short momentum scalp from the 61-62’s line. Shorting just ahead of or into the line break and covering right back out into the volume swell from the stop election/longs puking.

Obviously since there was no pullback back into the broken line post crush there was no classic continuation op as we would call it for the short biased swingers. They would have had to be content to sit on hands and miss the move unfortunately. Such is the life of a trader. But another group of members were undoubtedly stalking what we call a post crush exhaustion bounce, or something to that effect. As we agreed in chat the next discernible market structure below the 62’s was framed by Friday’s RTH low on the high side and extended on down into the Globex high 49’s from that same session. So that would be the zone where those longs would be looking for PA and/or flow to confirm a potentail bounce entry. As it turned out there was something for those members as well did you can see in the chart above. Note in light blue there was no question the 56’s were on plenty of trader’s radar and it started to firm up there as passive and aggressive longs stepped up fairly hard, especially the largest size. Though the shorts prevailed initially and proactive first push type bounce traders would have had to puke for a small loss or scratch at best, once the low of that rotation was in, subsequent pushes showed plenty of signs of firming up. For second push type entry guys the push in dark blue showed strong seller absorption and size leading out to the long side proactively against still chasing retail sellers. For any still waiting for later pushes, the last attempts back down in light and dark green showed paper thin relative volume from seller exhaustion ending in size leading out super hard to the long side. Though it’s off this chart given the big recent volume action in purple and likely new trapped shorts there, that was likely the first scale spot to stalk for most members. If you go back and look you’ll see that this newly minted minor structure got plenty of respect on the way back up. Obviously for those holding for subsequent scales the next structure above the 59’s was the same 61-62’s we just broke below. Unfortunately though, any longs from the blue or green areas would have had to scratch their remaining positions as it didn’t quite make it back there before rolling back over and making new lows. Regardless, a solid 4-5 handle move for the longs to the first scale spot for most members playing this bounce based on these metrics. Again, this is one of those sections of price action that you should run in replay if you have the means. Good stuff educationally and very Spoos personality specific IME. .02

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