Some Thoughts on Fibs, and Volume

ESZ3 Daily TCI Volume Profile 031113Good Evening (EST), Friends. Since it’s Sunday evening in my part of the world, I thought that I would take a minute to talk about the E-mini market in the context of a daily chart. Of course, most of us trade shorter time frames using Todd Mitchell’s tried and trusted methods. Having a sense of larger market trends doesn’t hurt, however, and in addition, many people here have separate portfolios that are devoted to longer-term holdings of stocks and ETFs.

I’m pretty agnostic about the market at present. It seems a little stretched to the upside, but the stochastics aren’t showing any particular concern. In addition, the Fed continues to provide a powerful tailwind to equities through Quantitative Easing. At some point, “tapering” of the program will begin, and equities and equity futures are likely to get spanked until traders get used to the new regime, but there doesn’t seem to be much point in trying to anticipate that for those of us who aren’t on the FOMC.

I’ve been dabbling a bit in Volume Profile, which is the histogram on the right of the attached daily chart of the E-minis. It shows the level of volume done at each price. The narrow yellow lines mark the area within which 70% of the volume for the period covered by the chart was transacted; in this case, that was 1620 to 1696. This is referred to as the “Value Area”. The maroon line is the single price at which the largest number of contracts changed hands (1689.50). This is called the “Point of Control”. 

As might be expected in a market trending higher, volume appears to have picked up on dips, but has been lackluster since roughly 1706. That makes sense, intuitively. Those who didn’t buy a dip might try to catch up on a move higher, and those short have to buy contracts back where they can, but there will be a price at which traders are no longer willing to pay up. Given the momentum, however, they are likely to be looking to buy pullbacks, and significant interest would be expected as the price action moves back to the Value Area. 

Given the relationship of the Fibonacci retracements to the Keltner Channels, the 1722 level  looks like a price where I will be comfortable initiating a partial long position on a pullback, probably by buying shares of the SPY ETF. Given where the Fibs currently sit in relation to the Volume Profile, I would not be expecting a move below 1690. If the price action moves in that direction, implied volatility on options should pick up as institutions look to hedge long portfolios, possibly offering a good opportunity to sell puts ahead of potential support. 

The 1722 level is, of course, some 50 handles from where the E-minis finished the week, and by the time contracts are changing hands there it is likely to feel like the bottom is falling out of the market. Given the range of activity in the daily time frame, however, this would simply represent a normal pullback within an uptrend. It’s always possible that a more serious reversal will be under way, and Todd teaches a number of methods that can help to determine whether a dip is something to be bought, or avoided. My own experience has been that many of my most successful trades have been “difficult” at the outset. The use of appropriate stops, however, even (or especially) when confidence in a trade is high, is crucial in helping to avoid damaging losses. 

Just some thoughts as a new trading week gets under way in the Far East. Here’s hoping that yours is pleasant, and profitable.

Best of luck!


About the Author kevin


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