The foundation of price movement as we all know lies in
supply and demand. Take the emini, all it is intraday is an auction of who is
willing to buy based on sentiment whatever that may be at the time. We have all
heard of trading ranges, but for the sake of mutual understanding here is an
example:
That is an intraday example of buyers and sellers carrying
out the auction. Often times you may see a strong move up and consolidation for
a few days then test lower. What is happening? Sellers who bought lower are
selling, when prices fall back often to previous volume points of control or
accumulation areas, it is solely price discovery to see, do we still have
buyers down here? When a trading range breaks, sellers close the cupboards in
the pursuit of a higher price to sell at, shorts begin to cover and as a result
price goes parabolic.
sell at higher prices, market makers, floor trader and other insiders brutalize
the tape in between these major areas of accumulation and distribution. Here is an example of something that
may play out this coming week:
have found that people are willing to buy above 1100, so if they accumulate
they will look for buyers and prices will continue until buyers and sellers
once again hash out price.
Why these areas? Mainly due to the low volume pockets
especially given the much larger volume below where buyers and sellers have
hashed it out and price has moved higher.
Where do trendlines and other examples of TA come into play? The trendline is just an
aspect for sellers to decide to distribute and the flipside is buy at support.
Notice when these are broken either supply or demand evaporates and prices
sprints to find either supply to meet demand or vice versa. Re -testing
trendlines, prices have broken above and have now met distribution, they fall
back looking for more buyers, if found the trend continues.
This may seem blatantly obvious as you are reading this,
however I feel it is often overlooked. If you change your perspective of what
your trading, for example, if you view an emini contract as a physical asset and
you see that people are willing to buy at 1110 and we are at 1065 where buyers
and sellers previously hashed out price, then it is something worth buying to
sell to someone willing to pay at a higher price. In order to do this you need
to take a long term bias out of the equation, price isn’t always reflective of
terrible economic conditions, ask yourself, are there buyers willing to buy
higher up given previous price movement? If so, and you are near an area of
accumulation than assume prices will rise and vice versa if we are at extreme
levels and buyers aren’t found and there are areas lower where buyers viewed it
as cheap go short.
That is the essence of mean reversion trading.
The red line appears to be a place where major distribution
would occur. A few reasons for it is that people who have held through this
mess want their money back and would be taking it. Imagine Microsoft where it
took a very long time for prices to break 30 per share because each time,
millions of people tried getting out near the price they originally paid. People who held through this aren’t
going to trust the market and will want out if we get there.
