www.scottpluschau.blogspot.com
But let's start with a question. What causes price to go higher in an auction? Is it A) The laws of supply and demand. B) Economic news. Or C) Corporate earnings/ratios/balance sheets etc.
My answer is A.
If you think the answer is B. Just take a look at the dismal ISM Manufacturing data this week and the ensuing rally in equities.
Scott, doesn't corporate earnings/ratios/balance sheets etc. have an impact on price? What about monetary policy, fiscal policy, and economic developments? Don't they have an impact on price? My answer is... "I don't care". You see when these developments make an impact, it will be reflected in the pricing patterns, auction profile, open interest, COT reports, and volume. My answer is unwavering. So what is the point in doing research on those things when it doesn't matter? Good question. I believe it would be a waste of my time and money. But with all due respect if whatever you do helps you make money, that is ultimately all that matters.
Ok let's go to the charts. Interesting developments in the Emini Nasdaq 100 and the Emini S&P 500 futures. The S&P 500 futures are rallying on the daily chart on decreasing volume. This is a caution flag. Is this a signal to start selling? If I was "long" I might, but certainly trailing a stop would be in the cards for me in this scenario. The problem with liquidating randomly without a pre-determined profit taking target being reached, the trade being invalidated, or a reversal signal being generated, is that price could rally through the upper trendline resistance I have drawn on the daily chart, (see right hand side below), and really begin to take off on an increase in volume. Getting back in is more difficult than adding to a winning trade.
However it is definitely not a signal in my book to sell short at this time. If the S&P does rollover and give me a reliable trading signal to sell short, it will increase my probabilities of success due to the structure of the daily chart. An example of what I might be looking for is a breakdown of a "Symmetrical Triangle" pattern such as the one I highlighted on the 30 minute chart (there was a breakout to the upside in this case), see left hand side chart below. That is a trade I would have taken with zero worry about being wrong or losing money provided that things continue this way in the bigger picture.
Side note on taking losses: Taking losses are to be expected. We must risk capital in order to profit. Profits must exceed losses in order to survive. Proper risk management, position sizing, trade management, and money management keep you in business. The correct way to look at losses for me is as overhead or a cost of doing business. I can't think of any business where there is no risk in order to profit.
In trading there is good risk and there is bad risk. Bad risk is where a trader doesn't have an edge, and the market is in control of the trader. Good risk is risk where the trader has an edge, and the trader is in control of himself.
(Click on chart to expand)
In the Nasdaq 100, the picture is the same. A noticeable decrease in volume on the rally along the upper trendline which I prefer to call a "Return Line" on both charts.
So if prices are determined in an auction and the laws of supply and demand, what is volume telling us lately? There is demand, but the demand is weak. It is a caution flag. Basically price discovery is showing enthusiasm, but the volume is not showing intensity.
But as long as the buyers continue taking out the current asking price, and the sellers keep raising their offers, price will continue higher until it has either reached an "unfair high", which means price does not attract any new demand, or demand begins to be met with an equal amount of supply, aka a "Stopping Price".
Should the sellers come in at that point and start cleaning out the bids, and buyers start to lower their bids, then this "supply" will send price back down in the near term toward a prior value area in order to attract demand once again. This is a dual auction market process that the futures markets trade in.
When it comes to trading which do you believe is nonsensical? Those last few paragraphs on this blog, or another blog that discusses technical indicators based on various ratios and formulas such as 2+1, and/or lays down drawings on the chart such as a "pitchfork" to predict a change in price direction?
I often get questions in email about books I can recommend on auction market theory. My answer is always, I don't recommend any books on this subject because while there may be certain things I like or agree with, there can be things I don't agree with, or the author leaves out, that I believe do great damage to traders.
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Source: Holiday special: equities update on the S&P/Nasdaq 100:
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