“No stops go untouched in the S&P”. One of my favorite ‘inside’ trader speak quotes of all time, coined by none other than our pal Danny Riley. Most who’ve been around the Spoos for a long time would rarely dispute that statement’s validity. It’s almost scary how often it ends up being the case, and that is in large part driven by the make up of the market’s participants. Sure, there are plenty of bonafide hedgers with principal positions in the cash markets (we’ll get to them later), but by and large the S&P futures is a market filled to the brim with day traders. Many of whom are less than experienced to say the least…

It’s almost uncanny how often and how predictably this scenario plays out in the ES. So much so I’m surprised I’ve never seen any of the now endless parade of ES outrights strategy touting trading educators slapping some sort of simple mechanical version of it on a plastic lunchbox and selling it. Not that any strategy is purely automatic to recognize and execute with the constant subtle changes in contextual details, but the old market maker initiated stop run move behind a very obvious line in the sand tends to be easier to predict and identify than most others – in the S&P futures at least. The driving force behind these moves is, like most relatively predictable behaviors, purely psychological. In this case mostly driven by the most powerful of emotions, fear. The way these moves tend to play out are framed around a couple key assumptions: First, since most traders are executing some sort of pattern based strategies around prior key market structures, it’s fairly easy to predict ahead of time likely areas of interest to both buyers and sellers. Second, markets are fractal and as such how “zoomed out” (or in) a view you take can influence your awareness (or lack) of what higher periodicity participants are likely to be interested in.  So with that in mind I thought I would post this action from Monday. IMHO it is a great example of how big a role the psychology of longer term participants colliding with day trader actions in the Spoos can take and how it tends to unfold with such familiarity. So in a way this is an extension of the discussion started yesterday in a member journal on the forum as to the importance of having a “big picture” view that drives you as a day trader.

Before drilling down into price action and orderflow, you’ll want to look at your longer TF plot and note what structures should jump right out at you in a given area. So the idea being well before your session ever starts to make a mental or physical list of key structures above or below you will encounter beyond the current price. The key takeaway being that you have no need to predict which way the market will go ahead of time. “IF we sell off I’ll want to be especially aware of this area, and IF we rally I’ll want to be aware of this area to stalk potential opportunities…”. Put yourself in a position of being a guy or girl considering or managing a position which is NOT a day trade. How might you frame the key spots in the market? All of a sudden you begin to see things like the 57’s being “major” enough to likely be important and on the radar of those holding positions for many days or weeks, not just intraday. And as such with regard to the 57’s, not just because it happened to be the prior day low. When you zoom out to see where that structure came from you’ll easily find that on 4/26 we broke above the prior S to R line at the 57’s from 4/23, then retested it from above almost to the tick and tried to rally higher. But then the market couldn’t hold on to it’s upside traction and sold off, retesting that line again from above. Can you envision traders who had gotten long on the aforementioned momentum break above, or from the pullback to the same 57’s line that followed then realizing that they were no longer able to hold the upside traction? If it were YOU as a longer term participant there, might YOU consider puking before your winner turned into a loser? Or perhaps you might have your stop on that longer term trade where? Behind that 57’s line maybe where all the sheeple put them – behind the obvious swing line in the sand? If you answered ‘yes’ to these questions, are your wheels turning thinking about how savvy participants might seek to capitalize on these likelihood’s? This is the kind of thinking I’m talking about…

So as we drill down into the tape history and stats below you can see the initial bottom of the selloff into the structure in question on Monday. I’d guess much of the short delta in the stats was driven initially by new day trader longs chasing the selloff, unaware that they were about to be running into a key prior support line likely attracting longer term decision makers. Note the action in light blue showing the swell of volume created by passive buyers stepping up into the short chasing day traders and the longer term players puking before they crossed over the line electing their stops and their would be winners turned to losers. And then once that flow was exhausted the push in dark blue showed more seller absorption but the addition of long deltas led by size on the second attempted push back down as shorter term traders took their fade trades. Nothing wrong with that up to this point IMO. But because you’d expect longer term stops to be yet un-elected behind the newly established line in the sand there you’d also expect market makers to likely try to hunt those stops if given the chance. So if you were long from the blue areas, you’d want to be aware of any stalling to the upside followed by fear driving the action on any subsequent retest of the 57’s, IF and when it came. And again that would now be fear from BOTH the longer term longs still in the market AND the batch of new long day traders who might have gotten greedy and didn’t scale or flatten despite the clues of weakening above…

As for the weakening clues I’m talking specifically about the pushes up in purple, pink and red. We rallied up off the 57’s line but then note on the second push up onto the 62’s in purple the volume becomes paper thin. Longs no longer quite so ambitious and willing to lift offers. Classic directional exhaustion flow. Also note in the stats that despite being an attempted push back up, the delta ending up being collectively short in that push. This was followed by more of the same paper thin print counts in pink. Strike two. This time though note that longs tried to get more aggressive, especially size. But also note that after trying to lift to the upside albeit thinly, the majority ended with strong selling off the high there via short finish. More of the same on the last push up in red. Strike three. So now if you were a day trader long from the blue areas what NEW information do you have as of what was happening right then? Longs betting on a continued move to the upside, BUT the market was unable to keep moving higher. In others words, new longs now trapped in the market along with the longer term ones still trapped of course. And how might they be feeling collectively if and when price started to slide backwards behind their entries? What might their response to that feeling be? Getting out of course. And how do longs get out immediately if they want to? They hit bids. Self fulfilling prophecy which ironically causes price to continue in exactly the opposite direction they’d like it to…

And as we say over and over again, top of book market makers love to build programs which identify and take advantage of exactly these situations. They take advantage of them specifically by pulling liquidity out of the order book on the desired side of the market. The idea being to make it easier for the market to quickly sweep out prices in succession, hopefully managing to pull price over established lines in the sand and electing stops likely to be behind those lines. When looking at tape history plots like the one here, these areas are easy to identify as they generally show thin print counts across a string of prices especially on the non favored side. Note the action across the range in yellow and more importantly where it is. Market makers pulling bid side liquidity causing the price to speed up and move quickly across that area, which in turn makes participants less willing to lift offers to bet against it. In this case once they succeeded in moving price over the case line in question, the market dropped like a stone eventually electing the stops/triggering decisions from the aforementioned longs still trapped in the market. The next structure below the 57’s was the 54’s line from 4/25 potentially treated as a former R turned S from above. Note after the quick slide how remarkably thick the volume swells there as the momentum slows and the remainder of the stops are elected. Late chasing sellers pile in but are absorbed on the passive side by smarter money shorts from above covering for a profit as prior longs book their losses and weak money shorts sell into the low there. Business as usual in the S&P folks, over and over and over again. So instead of complaining about these “predictable” predatory behaviors in the S&P, perhaps this will give you some ideas about how you might attempt to profit from them. It’s always better to be the hunter rather than the hunted, obviously. Hey HFT’s – ain’t no fun when the rabbit’s got the gun, is it?

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About the Author

Discovery Trading Group is a unique dojo focused on mentoring aspiring futures traders since 2010. It’s emphasis is on guidance in building bespoke processes and risk overlays rooted in market structure, price action and orderflow, with sound adaptable risk & bankroll management as a priority.

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