Trade of the Day

Context: The chart above is a 24 hour view of the ES on a daily periodicity. Note the darkened area, which represents a fairly large range in which price has been consolidating for several weeks. In auction market theory, the rule of thumb is that when a boundary of such a balance area is tested, and fails to break through the boundary, then the expectation is for price to eventually rotate through to the opposite boundary.

In this case, we see the test of the lower edge (the yellow arrow) is swiftly rejected. The expectation at the end of the yellow candle day (which was also a traditional market profile 'trend day' structure) was to make a higher high , perhaps consolidate the gains made on the test day, and then continue up.

An important component in applying market logic is to be prepared for anything and use the latest information provided to you. This morning, (I'm writing this post the day after the yellow arrow day) I awoke to find that price at the open of the regular trading hours gapped DOWN, 10 points! This is more or less the complete opposite of what was expected. That is a huge clue. Next, we consider that price is revisiting the area that is the lower edge of the balance area. Price is finding some sort of acceptance in an area that should have been rejected swiftly. Why? Well, the full answer is a seminar in itself, but it boils down to understanding that, in statistical terms, the edges of the balance area are '3rd standard deviation' areas. So, the longer price hangs around areas that were or are expected to be such statistical zones, the more likely it is that price will not respect the edge being tested.

Setup: Armed with the context above, the astute trader would be scouting a place to get short. Not just anywhere, but a place where risk can be controlled and where price is likely to turn due to an imbalance between real supply and demand (also a subject for another day).

Now look at the 5 minute intraday chart above.The turquoise lines on the chart indicate the opening range for the regular trading session. The lower of the two lines also happened to more or less coincide with the Initial Balance. For the first hour of the day we witnessed quiet rotations. Then, at the yellow candle marked as such, we observe a strong move down, breaking through the two aforementioned levels. That swift break down in price is the trader's heads up that opportunity is now present. We can state, objectively that the the origin of this break down in price was caused by an overwhelming imbalance between buyers and sellers AT THAT PRICE. The first time price revisits the origin of the imbalance, that is the highest odd's, lowest risk time to short.