In my last missive here on Slope, I mentioned the importance of context to trading. I also mentioned how different traders have different ways to frame price action in an understandable context that significantly raises the odds on their expectations for a given setup. In this example, I'm going to show you exactly what I look at, and how I read the tape and anticipated the blast off in the market that happened over the last couple of days. If you go back to my tweets (gmcgary), you're see I mentioned the market was setting up to rape the shorts, the day before the launch occurred. In this post, I'm going to walk you through what I was looking at and how I read it to reach that conclusion.
We'll use a daily chart of the ES as our big picture for gaining a feel for the context of price action:
What we have is a set of Keltner Channels draw on the daily chart and one horizontal line drawn at 1174.50. We'll pick up price action at the first oval. From left to right I'll refer to them as 1 through 5.
1) At this point we have the trend reversal hitting it's first key support level, which is the confluence of both the horizontal support level and more key the centerline of the Keltner Channel I have draw. Nothing unusual here. At reaching this level, I'd close shorts as the expectation is to bounce and back test the underside of the underside of the upper channel line. Move along nothing to see normal price action.
2) The underside kiss of the upper KC is expected, what is very funky is to do so with a hanging man. Also such a large range at this point is odd, and not normal for what my brain cells recall in this exact situation. That put's us on yellow alert. Price action is not acting according to known price and volume profiles that lead to a pattern completion, which in this case would be 1125.
3) At oval 3, we get a close below the mid line of the KC. That is consistent with a upcoming move to 1125, but the previous Hanging man calls for caution as we're still on yellow alert. Being suspicious of this market I'd only day trade at this point. The next day's close above the KC centerline is totally not per know price action in this situation that goes on to the original target of 1125. The pattern is basically blown at this point, so as far as a short opportunity we are on red alert.
4) While point 4 closes below the mid KC line, one might conclude wee haw we're on our way to 1125. Not so fast. Experience tells me we need to have two days close below the centerline in a row for the pattern to have any chance of completing. So at best we can go back a notch to yellow alert (as far as shorts are concerned).
5) The doji at oval 5 confirms it with a close above the KC midline. The pattern is completely blown.
The next day the only point in question was would da boyz get a close above the centerline during the day which I believe was around 1187, or would they go the after hours route and ramp the open. The simple fact was it was too costly to get a close above 1187, and as long as only one close was below the centerline, people who know this stuff wouldn't pile on short, so they had the option of doing the buying during Globex. Seeing the setup against the shorts, is what caused me to tweet that shorts were being setup to get raped. The rest is as they say history.
The take away I'd like you all to have, is there is a way that volume and price play out relative to a given setup. There is only one way to know what that is. Which is by watching live charts. Over time your inherent natural pattern recognition will just know what is normal, and know what isn't. It's all about trade expectation, but what no book I've ever read tells you, is how to decide when to take a given setup.
If you want to rock at trading you need to know the things that are out there in many books, but the real key is as MarketSniper likes to always say is right between your ears. You need to be aware of the context and how price action is playing out within that context. If you have read about risk management, trade setups, and God knows what, and are struggling at being profitable, then take a look at your efforts in understanding context. Again to quote MarketSniper "I only trade on my terms." What he really means is that when he has a setup that is occurring within a familiar context where he has a high expectation, then he takes the trade.
Lastly, I want to say thanks again to Paul aka "Peachin", who clued me into reading the tape. He's an old timer on slope, and pops in once and awhile. Listen to what he says if you get the chance. It's all golden.