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Futures trading can be a lonely business if you do it from home. So its good to talk to other traders. I was chatting with the head of a new Prop trading firm in London yesterday (as you do) and the topic got round to the market action we have right now. We got onto the discussion of transitions and how some people were better at spotting them than others. He knows one trader that can watch a dull market for weeks and then the moment it picks up, hes right on it. In tune with the new conditions almost immediately. That is a rare skill. Well consider that in more detail shortly.
Our challenge is this directionless market. From a long term perspective, futures trading has been pretty good. We went from around 1980 to 2170. From a short term perspective the market has no direction.
Futures trading volume is still decent. Id be expecting volumes as low as 800k per day (including overnight) at the low end of summer.
The medium term (weekly profiles) dont look so great. This week we have done nothing but trade around last weeks profile. Thats great on the days where we hit the extremes of last weeks range but not so good if we are trading in the middle of it.
The Challenge Transitions
Each letter represents 30 mins of trading. Click the image to view full size.
The challenge right now is best considered by looking at the past 5 days. The profiles with the day under then represent the day session (the time the underlying stock markets were open).
Thursday Opened and stuck in a 4 point range for over 2 hours. Then the market broke down.
Friday Market went up from the open and then got stuck in a 3.5 point range for 3.5 hours.
Monday Broke straight down off the open, then went into a sloppy range that lasted the rest of the day.
Tuesday A more volatile day for index futures traders. We managed to test the extremes of the prior week before breaking down and testing the lows of the prior week.
Wednesday a volatile day with good moves trading ahead of and behind the FOMC.
Tuesday and Wednesday were both good days to be futures trading. They are the sort of day trader days that we like because they swing nicely in both directions. Thursday, Friday and Monday were trickier because of the transitions from range to trend and vice versa.
Why do Transitions Pose a Problem in Trading?
Traders (certainly myself) get used to the market switching gears periodically. You get to expect certain type of activity when the market opens.
Where index futures trading becomes more tricky is when major behavioral transition occur intraday. .
Days where we open with low volume, very small range on these days (like Thursday last week), the action is sloppy and you can lose focus. There is not much going on, so you can very easily get bored, start checking email or just having your eyes glaze over. It is hard for some people to keep their concentration. So when the market does break, it is extremely easy to miss it.
Days where we more right off the open like Monday, catch us by surprise because overall we know the markets are a bit slow. So we come into the day with low expectations. As such, we can get caught off guard by a move off the open. By the time we realize whats happening, we are chasing a trade and getting caught in the chop. Friday was like this to some extent, we had a probe down off the open but then we marched up and spent hours chopping around.
As volume likely continues to reduce in the coming month, this will become more of an issue unless we address it head on.
If you want to trade these days, we have to consider a couple of things.
1 When a market moves sideways, especially if it does so close to the open, it is basically building short term positions in that area. You CAN trade around that area, fading the highs and lows. These are good trades. Eventually there will be a break. This could happen after many hours. It could range all morning and break in the afternoon. The key skill in trading the eventual major move for the day is your ability to stay focused.
2 Always watch for a break off the open. There may be a test one way and then a break. The test is often of a volume cluster from overnight. If you miss this break, and the market reverts to a range and volume drops, then you might want to think about stopping for the day.
In other words, we are going to have days with just 1 major swing. It may come before or after a range but if you miss it, then the day has passed you by.
Chasing the swing
If you do miss the swing, or the start of it then one approach is to scale into a trade in that direction. Just trade a small size and if it works add some more. That way you arent all in until you have some move on your side. If you end up positioned into the chop, you are in a better position to work your way out of it.
CSI Cumulative Sheep Index
The CSI is a tongue-in-cheek name for an indicator that shows relative volume. At any time it shows you how much above or below average we are in terms of volume. In this case, relative to the last 60 days.
Traders are like sheep when a move comes in and it becomes clear, they jump on it. At first just one or two sheep move but then the others see it and the whole herd is going one way.
With this in mind, all that matters here is not the absolute number but whether its going up (more sheep coming in right now), down (less sheep coming in right now) or sideways (average).
Using this, along with correlated markets helps you to identify if a move really has some power behind it or if overall interest is dropping off.
Plan for today and the week ahead
An eye on overnight volume for a clue as to how much participation will come in.
Look for a move off the open because it might be all you get. If missed, consider scaling in as it could be a one way move.
If volume drops and/or NQ/YM start moving in different directions presume we are reverting to chop
If the market chops around early on, try to stay focused for the break.
If the market chops after a decent (e.g. 8-10 point) move. Consider we may be done for the day.
Obviously if volume comes back into the market, VIX increases and we see
Weekly Numbers
Range 2152> 2172.50
Value 2159.50 -> 2168
S1 2156.75, R1 2174.25
Daily Numbers
Range 2152 -> 2169.25
Value 2156.75 -> 2164.75
Globex 2159.50 -> 2165.50
No surprises on Friday but on Sunday evening, we managed to finally break out of the range. Of course, that's overnight and we need to hold this in the day session today.
So today we should look back at last week and we can see that anywhere from last weeks high down to around 2168 which is the high of where most of the volume traded last week.
If we start trading down through 2168, then we'll most likely revert back to rangebound behavior a slip back into last weeks action.
Plan
- Today is all about whether we can keep the new highs made overnight and possibly push upwards some more
- Look for a pullback to last weeks high/2168 and for volume to come in if it holds
- if 2168 breaks, then expect a repetition of last weeks action
- If we move up from the open with no test, be patient as it may take time for buyers to commit
Weekly Numbers
Range 2152> 2172.50
Value 2159 -> 2167.50
S1 2156, R1 2176.50
Daily Numbers
Range 2157.50 -> 2171.75
Value 2164.75 -> 2171.25
Globex 2170-> 2177.75
And it seems we couldn't! Back to the range. Although maybe an extended one.
Yesterday, we basically pushed into last weeks value area and traversed to the the other side of it (last weeks VAL was 59 and we got down to 59.75). We have pushed through that overnight.
Yesterday a few nice moves off the open but then rangebound in the afternoon. So back to the mode we were in last week....
Plan
Look for a move off the open because it might be all you get. If missed, consider scaling in as it could be a one way move.
If volume drops and/or NQ/YM start moving in different directions – presume we are reverting to chop
If the market chops around early on, try to stay focused for the break.
If the market chops after a decent (e.g. 8-10 point) move. Consider we may be done for the day.
Obviously if volume comes back into the market, VIX increases and we see a decent swing we can look for continuations
This range is getting old so it could break any time - it's like a coiled spring. We aren't seeing a lack of volume - no days below 1M contracts yet.
Weekly Numbers
Range 2152–> 2172.50
Value 2159 -> 2167.50
S1 – 2156, R1 – 2176.50
Daily Numbers
Range 2159.75 -> 2172.75 (day) / 2177.75
Value 2161 -> 2167
Globex 2157.50-> 2171
So the range appears to have broken - or has it? That's the question today. We had a good breakdown and just under 2 million contracts traded.]
Thing is - depending on how you define the range we have either just poked through the low (2143.25) or not yet hit the bottom of the range 2139.50. This could just be a test of the lows.
So today I'm looking for continuation down or back to the range. Breakdown target would be 2110.25.
From a weekly profile perspective we are below the major distribution from last week. So if we do move up, I'd be a little wary in a long trade as we approach 2157.
Plan
- No bias into the open. Looking to see if this is just a probe of the low or if we are breaking down
- Consider upside move a potential test until we get back to 2157, after that we are back in range mode
- Look for acceleration past 39.50 to confirm the break.
- overall expectancy is low to the upside in terms of participation and high if we get downside participation
Weekly Numbers
Range 2141.50 > 2177.75
Value 2141.50 -> 2167.
S1 2156, R1 2176.50
Daily Numbers
Range 2141.50/2164 / 2171
Value 2143.25 -> 2151.75
Globex 2145.25 -> 2154
Market value is a big factor in the moves we are seeing right now. Or rather, an understanding of Market Auction Theory, Value based concepts helps us to make sense of this action. We’d seen the market push down on Tuesday and participants breathed a collective sigh of relief thinking “we’ve finally broken the range”. Or had we?
Here’s an image from the pre-market prep on Tuesday:
Watching the market on Tuesday, we had just under 2 million contracts traded, and we really pushed down hard. So it really felt like a breakdown of the medium term range. When you look at the above image, taken on Wednesday morning, there’s an argument both for Tuesday being a test of the lows (2143. 25) and a failure to get to the range low (2139.50). The bottom of a range is always a little bit subjective and it’s better to treat those areas as zones rather than absolute “make or break” levels.
So the scenarios going into yesterday were this:
It’s a real break, in which case, we’d expect volume on any move down as more people realize it’s really breaking and try to take advantage of it (speculation)
It’s not a real break, in which case we move up and get lower volume, less volatility.
And of course it looks like we moved up back to where medium term market value resides. Back to the range.
Here we can see this weeks profile on the right and last weeks in the middle. We can see last weeks profile is “D” shaped and tapers at the end. This is classic “trading around value”. So after we broke down Tuesday, we wanted to then see the market test the “old” market value and reject it. A move up to around 2058 and then a rejection to the downside would have been a green light for speculators to play the downside. What we didn’t want to see was it to start trading back into market value. And on Wednesday – that’s exactly what we did.
So what we did on Monday and Tuesday was effectively test the high and low of the range. So there’s nothing as yet to say we have shaken off this range but at least the market woke up for a day on Wednesday. As we discussed on transitions last week, a lot of traders will have missed that because they probably came into the day with expectations of a low range slow day.
As we can see we are now clearly back into the range, so we expect to keep trading around market value. The thing about these ranges, they are like coiled springs. We build more and more positions in the area until eventually the pressure builds and the market breaks away. That can happen any time but until it does we can presume:
- The best trades will be to buy the bottom of the range and sell the top of the range
- The closer to the middle we are, the poorer the trade opportunity. After all, we traded more in the middle and that means when we get to the middle there is more chance of choppy action
- After hitting the bottom, we can have an overall long bias until we hit the top of the range and then we have an overall short bias until we hit the low of the range
The yellow highlighted area is Tuesday, a nice breakdown almost 2 million contracts. The purple highlighted area is Wednesday, very low range lots of chop and under 1.4 million contracts.
Most markets will go up and down intraday, one way days are rare. So despite our bias we have to be ready to trade both ways. We also have to be ready for the market to transition from chop to range.
We could deliberate and debate over this market value phenomenon. We know it happens, we know that ranges tend to pull the market back like a magnet. Some say it’s “price acceptance” that buyers and sellers agree that these are good prices to trade at. If you think about it. When a lot of volume trades in an area that is because buyers met sellers there. In my opinion, when buyers and sellers trade with each other it is because they DON’T agree on price. After all – surely the sellers and buyers don’t agree on where they think the market is going after they enter their trades. They think the opposite.
Anyway – we always have to be alert for the break. And if it does break, the market is “coiled” enough to give us a run. So whilst we may not catch the start of the break, we should still be able to jump on board.
Plan for today and the week ahead
- Be alert for the breakdown. High volume, aggressive on way trading but otherwise……
- An eye on overnight volume for a clue as to how much participation will come in but also as the steps in the overnight volume profile often holds
- Look for a move off the open because it might be all you get. If missed, consider scaling in as it could be a one way move.
- If volume drops and/or NQ/YM start moving in different directions – presume we are reverting to chop
- If the market chops around early on, try to stay focused for the break.
- If the market chops after a decent (e.g. 8-10 point) move. Consider we may be done for the day.
Weekly Numbers
Range 2141.50 –> 2177.75
Value 2146.50-> 2166.50
S1 – 2156.75, R1 – 2174.25
Daily Numbers
Range 2145.25 / 2147 -> 2158.25
Value 2151.75 -> 2155.75
Globex 2159.50 -> 2165.50
Well, back to trading, although I can't say I'm overly excited...
Volume is down, Friday was 1.4 million and the range is down. We haven't seen a 4/5 point day yet. Unless we see news to move the market, it'll probably be like this (or worse). Most summer times we see this action till the end of the first week in September.
For the past 2 weeks the range has been 2165.50-2190.75 but let's not forget the earlier range 2143.50-2177.75
Value-wise, last week we had most trade between 2176.50-2184 (the value area), so watching that into this week.
Ranges are still around 10 points. So obviously no 10 point stops and 50 point targets.
Plan
- Neutral bias.
- looking for longs at 65.50 and 76.50
- looking for shorts at 84 and 90.75
- staying wary of a break of 2165.50-2190.75 but not
- looking for early trades off high volume nodes from overnight
- other than that - wait for 15-30 mins for a range an intraday range form and fade that
Weekly Numbers
Range 2165.50 > 2190.75
Value 2176.50-> 2184
S1 2167.75, R1 2193
Daily Numbers
Range 2172.50 -> 2183 / 2184.25
Value 2176.50 -> 2181.50
Globex 2175.50 -> 2184.50
Still in the range but now at the top end of it, so looking for a break or a fade back to the bottom of the range. Volume still to the low side.
Yesterday we basically traded around last weeks value, so again it's reasonable to expect a rotation down to trade around it some more.
Yesterday was a 10 point range, not bad for the time of year and the rotations were of decent size.
Plan
- expectation of a rotation down from the range high (90.75)
- if we push through the range take continuation trades only on exceptional volume
- otherwise look to play to the other side of value.
- looking for early trades as there is a high chance of choppy action later on
- looking for longs below last weeks value 76.50
Weekly Numbers
Range 2165.50 > 2190.75
Value 2176.50-> 2184
S1 2167.75, R1 2193
Daily Numbers
Range 2173.50 -> 2183.50 / 2184.50
Value 2176.25 -> 2181.25
Globex 2179.25 -> 2188
Very low volume yesterday, just over 1.1 million traded. All my horizontal lines disappeared off my chart too - which means it's probably my lucky day.
Not much to see here, still trading around last weeks range.
Yesterday followed our game plan, looking to fade the market at 90.75 (we actually pushed 3 ticks through) but it took a while before we got a break,so whilst the "bigger picture plan" - the market did work - the better trade was fading the high volume nodes that developed intraday.
Obviously, that strategy would have worked better in the morning but we hit the extremes of that intraday range many times.
Plan
- expectation is for continuation down to towards last weeks low/value low (even though it appears to have stalled overnight) 2165.50/2176.50
- if we push through the range take continuation trades only on exceptional volume
- otherwise look to play to the other side of value.
- looking for early trades as there is a high chance of choppy action later on
- on the lookout for intraday high volume nodes to trade around, especially if volume is in the same range as yesterday
Weekly Numbers
Range 2173.50 > 2191.50
Value 2176.50-> 2185.50
S1 2167.75, R1 2193
Daily Numbers
Range 2179.25 / 2184.25 -> 2191.50
Value 2186.25 -> 2189.75
Globex 2180.75 -> 2187.75
