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ES - Volume analysis and formulating a plan
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ES - Volume analysis and formulating a plan

  #1 (permalink)
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ES - Volume analysis and formulating a plan

As a follow up to the thread Tomorrow's chart, i thought it might be helpful to create a thread dedicated to the process of creating a plan for the next day using volume analysis only with the CME volume tool. The idea is to use this free tool and see if we can make sense of it for the next day.

What do you think? is the tool offering enough historical data to make an educated guess at future trend direction for the next day or to locate important levels where you might be interested to trade?

link to the CME ES volume chart: clickme

Once there click on the 'V' symbol under the 'Charts' heading:
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Here is the actual volume on the ES (Friday April 27, 2012):
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Quick Summary
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Thought I would take a first swing at this. I think it's a great idea to use the CME's volume profile data in comparison to the tools I have. The only downside to the CME's volume is it's not RTH from what I can tell. Not that that's a bad thing but I prefer to watch equities volume during the cash session as that's where a majority of the volume takes place.

So, on the first chart (CME chart), you can see that we've been moving higher and higher after a big gap up on 4/25. This move higher has some glaring low volume pockets with the most recent being displayed on the chart here with circles indicating the area which is the 1390 - 1393 area.

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By looking at the numbers traded a little closer, you can see that there was very little interest in these price areas. Price blew right through it and was tested again on Friday which was completely rejected and the market moved higher.

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So what can should we expect going into next week and how should we play this?

The first thing to do is look at where price may gravitate to to help formulate the potential outcomes.

In this chart, I have a volume composite of the last 30 days as well as the cumulative delta. The volume composite also displays the current developing value areas (blue lines) and point of control (red line) as well as vwap (pink line) for that period. This shows the progression of price fairly clear. On 4/23, price moved out of value and was immediately bought up. On 4/24, price retested the developing value area low (DVAL) and found more strong buying support pushing price all the way up to the developing volume point of control (DVPOC) or most fair price. This created a big over night gap up and price was heavily absorbed at the DVPOC which pushed price up and out of value.

The ideal situation would be to see the developing value area high (DVAH) move up to the upper distribution area and contain price. We would then most likely see a rotation back to the DVPOC which would test the break out area. The DVAH doesn't necessarily need to shift higher if we're met with a gap down on Monday or strong rejection back into value. One thing to note is 1394 was the previous DVPOC area before the market started to move lower. Price bounced off this area on Friday. A break below this could confirm we head back down to the 1382.75 - 1383 area.

Looking at the cumulative delta, we can see two blow off candles that occurred at each day's high signaling potential exhaustion.

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Looking at the daily chart, from a more technical analysis perspective (not that the previous wasn't), you can see we hit the top of the current bearish channel which could provide resistance here (for now) and further support a retracement back down to the middle of the channel which would take us to the lower 1380 area to start. You can also see that price broke below it's supporting bullish trend line where I would imagine a lot of weak hands got short there. Once these traders ran out of selling juice, someone absorbed these prices and trapped them causing the huge short squeeze all the way up to the top of the bearish channel where more sellers may have started to step in.

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So how do we trade this? This analysis is simply my observations of what I see unfolding and I would recommend that you use your own discretion as always when looking at the market and trading. So, in short, this is not trading advice! This is merely potential outcomes which is why I'm not giving specific entry areas. On the current scenario, you could look to find a short entry using your own set up with the thought of testing the 1393 area again with the potential of breaking lower to test the 1390 area. Just use your own edge as always. This would be a valid idea if we open around where we closed on Friday. A gap up would obviously change things a bit and may require looking for more long entries as price is continuing to push higher until it finds strong selling resistance again. A gap down could see a test of the 1401 area again with potential rejection and see the market move lower and test the above referenced areas.

As always, it's important to digest what the market is showing in the morning and act upon it based on your research.

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Just a quick update from yesterday's summary. I don't plan to update like this but just for this one time. This AM, we opened up right at Friday's VAL. Based on the weakness of the ON session, I sold this area right off the bat @ 96.25. Was able to scale out and added 2/3's position on the retracement up to 95.50 where I sold 94.50's and have scaled out again. We appear to be holding at the IB low for now. But per yesterday's thoughts, we are filling in the volume gap but it's been a pretty low energy move so far.

More later...

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Just a wrap for the end of the session. Price was being held down at the IB low just about all day. I did add one last time off Friday's low and was able to get my final target hit two ticks above Thursday's lower balance area. This worked out great and filled some volume in from that previous volume gap. The day was extremely slow but there was a trade to be had. Today was the first time that the IB low was broken since 4/23. Not that there is any significance to that but it was great to see a quick break lower to let the market do what it needed to do.

After hitting that area, we bounced pretty quickly as it seemed many were gunning for that level as others were most likely waiting to add to their long positions. Anyway, just wanted to show an example of putting a plan in place and certainly don't want to take over this thread.

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Cheers,
PB

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I'd like to thank PB for his participation and having accepted my personnal invitation to share his views on volume analysis. I hope other people will participate in the form of questions or ideas about this way of conceptualizing price action. I have a couple of questions i would like to ask PB or anyone else regarding the movement of the value in regard to Yesterday's Value and the closing price.
  1. If today's value area location is moving higher than the previous day's value on volume increase, what's your expectation for the next day?
  2. If today's value area location is moving higher than the previous day's value on volume decrease, what's your expectation for the next day?
  3. If today's value area location is moving lower than the previous day's value on volume increase, what's your expectation for the next day?
  4. If today's value area location is moving lower than the previous day's value on volume decrease, what's your expectation for the next day?

Now, if we add the close to this equation, would it change your expectation? I see a minimum of three potential scenarios:
  1. Price is closing above value
  2. Price is closing below value
  3. Price is closing within value

I can see two more possibilities if price closes within value:
  1. Price is closing below the POC within value
  2. Price is closing above the POC within value

So basically, would it make sense to formulate our expectation based on these considerations?. What would be your expectation according to this matrix?

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trendisyourfriend View Post
I'd like to thank PB for his participation and having accepted my personnal invitation to share his views on volume analysis. I hope other people will participate in the form of questions or ideas about this way of conceptualizing price action. I have a couple of questions i would like to ask PB or anyone else regarding the movement of the value in regard to Yesterday's Value and the closing price.
  1. If today's value area location is moving higher than the previous day's value on volume increase, what's your expectation for the next day?
  2. If today's value area location is moving higher than the previous day's value on volume decrease, what's your expectation for the next day?
  3. If today's value area location is moving lower than the previous day's value on volume increase, what's your expectation for the next day?
  4. If today's value area location is moving lower than the previous day's value on volume decrease, what's your expectation for the next day?

Now, if we add the close to this equation, would it change your expectation? I see a minimum of three potential scenarios:
  1. Price is closing above value
  2. Price is closing below value
  3. Price is closing within value

I can see two more possibilities if price closes within value:
  1. Price is closing below the POC within value
  2. Price is closing above the POC within value

So basically, would it make sense to formulate our expectation based on these considerations?. What would be your expectation according to this matrix?

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Glad to help out! Great questions here! I'll have to put some good thought into this.

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Expectation Higher based on volume profile


Quoting 
Monday's settlement: 1393.50
Monday's Volume: 1,319,740
Friday's Volume: 1,610,498
Volume Change: Has decreased (-290,758)
(VAH, POC, VAL from http://www.mypivots.com/marketprofile)
VAH: 1394.25
POC: 1392.25
VAL: 1391.25
Monday's settlement within value, above POC
Monday's value area location: Overlapping Lower

The fact Monday's settlement is above the POC with a slight decrease of volume may be considered as a form of pullback to an area where price has clearly formed a base in terms of volume.

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Last edited by trendisyourfriend; May 1st, 2012 at 10:44 AM.
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Quoting 
TUESDAY
settlement: 1400.25
Volume: 1305365
Volume previous day: 1319740
Change: -14375
(VAH, POC, VAL from Market Profile Daily Values)
VAH 1410.75
POC 1407.75
VAL 1400.25
settlement within value (just), below POC
value area location: Overlapping Higher

The closing price below the POC (almost below VAL) gives a negative connotation to this end of day even though the value area is overlapping higher. Small decrease of volume for the day compared to the previous day. My expectation is a test of lower levels.

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Private Banker View Post
Glad to help out! Great questions here! I'll have to put some good thought into this.

By answering a question to another poster i found out this video where the speaker talks about the relationship of the pivot range when it overlaps higher or lower etc. I thought you might like to look at it, here is the link:

Created by Camtasia Studio 7

go to the segment that starts at 31.13 minutes in the video. It's not about the value area but it's quite close in my opinion.

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