Another spot from Wednesday discussed in the room I thought I would recap, as I think it could be a great guide to learning how to anticipate likely actions around key market structures, and potentially exploit them. We never really know for sure what will happen next relative to every risk/reward overlay, of course. But getting in the habit of simply noticing “who did what and where”, and guessing their likely responses if they end up getting it right or wrong can alone be a solid foundation for building a trading model/process. And as always the first link in the chain for such an approach should be making sure you have taken in the lay of the land prior to the session. What are the key structures above and/or below the current price as of the time you sit down? Which structures are likely to draw the attention of the widest range of participants across a range of periodicities and objectives? Asking yourself these questions prior to your session should be as routine as breathing in our view…
Obviously the market chose to move up in this session, so in looking left hopefully you easily found the 88’s line jumping right off the page at you first. The next above that was the prior acceptance in the 92’s-94’s range followed by the 98’s into the 2700 figure above that. The idea being of course that these would be the areas you would wait for to seek potential opportunities whether for entries or scaling/exits. Someone suggested that these examples might be easier to digest if the colored sections were bulleted individually, so let’s try that…
Pink: Classic swelling of relative volume at price coming into the test of the case 88 half from below. Plenty of passive shorts absorbing buyers and responding aggressive shorts off the high there as well. Many of whom were shorter term/day traders looking to fade the big current blast up, betting on a bounce and rotation off the significant 88’s structure. Many short term sellers now potentially trapped.
Green: Immediately into the first shallow pullback, buyers step up hard against the sellers, lifting offers up and out of the low there. Note in the stats the largest size were those leading out to the long side against a net short broad market. Definitely not what the day trader sellers from the pink area wanted to see. So the closer price got back up to the high made in pink, the more nervous they would likely become and begin to consider exiting.
First yellow: Top of book market makers build entire strategies based on identifying where the weakest money got in, and where those fairly exact pressure points are likely to be so they can take the other (and likely profitable) side of those trades. The thin jumbled volume seen in through here is the result of the market moving relatively quickly in response to top of book offers being pulled, allowing them to be easily swept up to the next price. This obviously succeeded in yanking price over the line of the current rotation high made in pink.
Light blue: And where do you suppose the weakest money day traders who entered in the pink area might have put their stops? Just over the swing line where “logical” thinking tells them to put them maybe (lol)? So once the aforementioned offer pulling succeeded in taking the auction over the line in question, those stops were elected – in other words converted to limit or market orders lifting the offer. And on the other side of many of those day trader losing exits were winning exits for market makers/scalpers long from below playing the fear driven reactions of short day traders. Never forget that fear is a far more powerful emotion than greed…
Second yellow: Once the day trader stop flow on the other side of the 88’s swing was exhausted, obviously the market was either going to rally or fall. You never “know” this ahead of time, nor is it requisite. Plenty of new longs playing the breakout past the 88’s, but also plenty of shorts betting on a headfake on other side of them in the light blue area as well. Same old, same old. Top of book market makers “helping” the auction along by test pulling top of book liquidity on either side to see who they can get to puke, and in this case it was the sellers once again who gave in. Note the classic relatively thin and jumbled print counts per side once again, with the thinnest counts on the bid side – aggressive sellers unwilling to hit bids to get in against the obvious upside pressure, and up we go with a burst of speed once again. And that upside pressure was fueled by any remaining shorts from the light blue area plus longer term players with much wider stops throwing in the towel and exiting by lifting the offers.
Dark blue: As we approached the next key structure above on the radar of most participants, we finally began to see some new sellers willing to step up against the late chasing buyers. At least some of this flow was also likely from longer term non-day trader players making bets, adjusting hedges, etc. on the back side of the 88’s below now that it became clear that line had broken for real and held as well. But overall note the thickening relative volume per price and the symmetry of a balanced two sided auction there.
Light red: Once we had tested the 92.75 inside zone price and all the buyers and sellers who wanted in or out were done, note the starkly thinner volume per side above the case price there. The classic look of exhaustion flow, and as usual it’s no mystery why it happened to occur right there. I assure you there were plenty of offers there either in the book or as potential iceberg flow to build volume at price similar to what you had seen earlier in the thick areas. But prints are thin there because buyers were exhausted and no longer willing to lift offers with their former vigor. By this point most any shorts from below, even the much longer term ones wanting out had thrown in the towel. In addition, not too many more longs were willing to keep buying the high tick after a 10+ handle or so straight up in the air rally, obviously. And likewise, market makers generally don’t like to cross the spread so since they couldn’t sell passively they weren’t coming to that party much either. Add it all together and you get the look of the two sided exhaustion flow in light red folks.
Dark red: More of the same unremarkable thin-ish volume on the final push up to test the zone case 94.75 price to the tick. I suspect that most members trading swing to swing long from below that hadn’t scaled based on the buyer absorption in dark blue or the hard rejection in light red, saw this as the last sign to scale or exit to take profits.
Purple: After ranging for a bit, we did carry on upward to test the next structure above which was the 98-99’s as marked and on into the figure 2700. Though I just marked the stats area below, note the paper thin volume at price in the alternating pushes and pulls as the market ranged across this area. Also note the similarly alternating and quite strong short and long delta divergences in the stats below as the market grinded to try to find its footing and collectively decide what to do. As it turned out, we did continue on higher to test the 98-99’s and into the 2700 figure to the right of this chart. I’m sure the longs from below running multiple scale risk overlays were thrilled to take that next rung up and get to their second scale spot. Though it’s off this chart obviously, be sure to look back and note the big print counts from buyer absorption on the first push there. Once again the crowds on both sides swarmed, predictably testing and initally rejecting the case prices nearly to the tick. This was followed by the classic paper thin prints hard rejection and high failure on the second push as well due to buyer exhaustion. Business as usual in the S&P…
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.
FUTURES TRADING IS RISKY AND LOSSES INCURRED IN CONNECTION WITH TRADING FUTURES CONTRACTS CAN BE SIGNIFICANT OR TOTAL. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. WHILE THERE IS GREAT POTENTIAL FOR REWARD TRADING AND/OR INVESTING IN COMMODITY FUTURES, THERE IS ALSO SUBSTANTIAL RISK OF LOSS, INCLUDING LOSSES EXCEEDING YOUR INITIAL INVESTMENT. YOU MUST DECIDE YOUR OWN SUITABILITY FOR TRADING AND/OR INVESTING. FUTURES TRADING AND/OR INVESTING RESULTS CAN NEVER BE GUARANTEED. THE PRINCIPAL OF DISCOVERY TRADING GROUP IS NOT A COMMODITY TRADING ADVISOR AND IS NOT HOLDING HIMSELF OUT TO THE PUBLIC AS SUCH. THEREFORE, NOTHING HEREIN SHOULD BE CONSTRUED AS AN OFFER OR ADVICE TO BUY OR SELL COMMODITY FUTURES, OPTION OR FORWARD CONTRACTS, OR INVEST IN ANY COMMODITY FUND OR POOL. ALL EXAMPLE CONTENT SHOULD BE ASSUMED HYPOTHETICAL AND IS DISCUSSED FOR EDUCATIONAL PURPOSES ONLY. https://discoverytradinggroup.com/a-disclaimer