FOLLOWING THE AUCTION – 3 Things to know about Market Profile Singles

This week in Following the Auction, we’re looking at ‘singles’ on a market profile chart.  A ‘single’ is a market profile term representing  one or more TPOs that stand alone within a whole day’s profile.  Keeping in mind market profile is not a trading system but a way of organizing data, one cannot understand profile development without recognizing one fundamental fact, it’s an auction. Let’s start with a picture, the easiest way to explain, please click to enlarge.

Given the market is continually moving from balance to imbalance and this process plays out over all time frames, this is how the day time-frame on 4/9/15 developed. Looking at the 3 charts above, the first a regular 30 minute candle chart. The second is a Market Profile chart in an expanded view (each TPO, covers a price increment on the horizontal scale, the same as a candlestick). The balance areas circled in yellow are where price has rotated back and forth between unfair highs and lows, probing to search for and confirm value. High volume nodes are formed in this process and are another way of saying time spend at price = value.

Here are the 3 things all traders must understand about single prints…

1. Single prints are the opposite of value! They express a perceived change in value and a participant driven, generally emotionally charged, auction to a new price level. Singles are the opposite of High Volume Nodes or HVNs which develop out of the rotational nature of price movement in an accepted area and = value.
2. Single prints are a sign of strong conviction by either buyers or sellers. Singles are frequently seen on trend days as price extends from balance to balance, as well as on balance days at the range extremes as buying or selling tails. A line of singles can mark reversals in trend and show rejection with price either too cheap or too expensive at that point in time.
3. Single prints are key day-trading references. In an uptrending market, a pullback to an area of singles, if sentiment has not changed will represent a buying opportunity. However context is king and a long term bullish trend has many smaller time-frame bearish days, even weeks. If a price above an expanse of ‘bullish conviction singles’ is deemed ‘too expensive’ by the auction participants, a trading opportunity also exists… the single prints below will be retraced, without a doubt. 

Last week the market developed a balance area between 2065 and and 2080. Friday’s low at 2066.75 left the profile with an 8 tick (singles) buying tail, showing rejection out of the lower extreme of the range. The if/then scenario became to test the top of the range and possible continuation as the balance area was quite developed. And that’s exactly what happened, the entire balance area was traversed! Then after spending some time building value at the upper end of balance, price made another push higher, then chopped into the close. The chart below goes back to mid-February and shows the recent balance circled in yellow with the prominent VPOC at 2074.50 in pink below price and another prominent VPOC at 2101 from the prior balance area above. A magnet and also an area to watch as previously prices above 2100 have shown little ability to attract new buyers, could earnings season change that? We’ve heard positive and negative excuses for quarterly results, and projections. As always with any auction, price is the advertising mechanism, regulated by time, the success of which is determined by volume. The end of an auction is marked by excess, balance, followed by decline. Whether you’re bullish or bearish keep an eye on volume near these highs for indication of acceptance or rejection on this third attempt to be solidly accepted above 2100.

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Have a great week! Trade smarter! Never more often…

 

FOLLOWING THE AUCTION – MARKET PROFILE BASIC LANGUAGE

FOLLOWING THE AUCTION this week we want to answer some requests and go over some basic profile language and definitions. Remember explaining market profile is a book! So to keep it short enough for a post, we’ll cover some basic information viewed through the window of the last two trading days, and continue to cover additional terms in future posts.

In the chart below we see Thursday and Friday, February 5 and 6, 2015 represented by a Market Profile chart. Market Profile charts are available from a variety of software companies. The MP software you see in Lewis’s charts comes from Inside Edge, and is excellent. Look under the education tab where you’ll find a 3-part Market Profile Class by Charles Cochran. Inside Edge market profile software’s focus is the directional movement of volume through time and the distributions. The software below is easy to see for my purposes and so below on the left we see the profile closed and on the right we have key references marked from Thursday as we come into the trading day on Friday morning. Click to enlarge.

The profile is composed of TPO’s, and each letter is considered a TPO. The opening bell at 8:30 Chicago time starts with the letter A and represents the first half hour of the trading day. At 9:00 a new half hour starts with letter B and continues to 9:30, together period A and period B form the IB or Initial Balance. The day progresses with each half hour and a new letter, until the bell rings at 3:00 pm, actually very similar to a bar chart. Of course the market trades virtually 24 hours however we collect the data via session times and the chart above shows the US day session only. These are generally the most active trading hours as the unlying stocks are also trading, sometimes however there is significant market moving news during the US overnight.

Additional terms, VAH, VAL, POC, VPOC and Singles. Above value is represented by the blue colored TPO’s, the grey TPO’s are out-of-value. The Value area is defined as the range of prices where 70% of the TPO count occurred. The VA represents where the majority of market participants traded. VAH and VAL are value high and value low respectively. POC is the price at which the highest number of TPOs’ occur and is short for Point-of-Control. VPOC we covered before in a post specifically about VPOC and is the VOLUME Point-of-control, note there is no volume showing on this MP chart. Consider value time relative, for the purpose above we’re looking at value related to individual days. Above we can see value is overlapping and higher from prior day.

Let’s narrate how the day unfolds via market profile…

• Coming into the open the market has rallied off better than expected employment news, A period trades down to VAH from Thursday and finds responsive buyers.
• B and C period one-time-frame up, slowing at 2067.25, the end of the single print TPO’s from 12/31/15.
• D period is an inside bar which doesn’t end one-time framing.
• E period makes an equal low to C period, can not take out C;s high-of-day, and stops one-time-framing higher.
• F period, very tight, stays above developing value on the day but is unable to get above E period high,
• Without upside extension possible G period has a liquidating break and stop run below E and B period lows and then rallies back toward the scene of the crime.
• Unable to get back to G’s high, H period auctions down to one tick above key reference, Thursday’s POC at 2052.25 and stops.
• I period trades to within a tick of H low, now the low of day, leaving a ‘poor low’. A poor low or poor high is defined by anything less than 3 TPO’s of singles. H period is one tick lower than I period. Poor lows and poor highs are frequently revisited as they represent an ‘unfinished’ auction. However all trading decisions are best made in context.
• J period holds ‘Unchanged’, which is the prior day’s close, and looks above I period by 1 tick.
• K period opens and continues to push back toward Friday’s open, 2061, with a 2 tick peek above, the open is rejected and the market auctions lower, having clearly rejected Friday’s open… time to check Thursday’s open.
• L period continues the push down taking out our ‘poor low’ as expected.
• Stopping a tick shy of Thursday’s open, M period, now going on 3 pm, rallies back to the fairest price on the day, POC, 2053.75

Trading with the developing value and keeping track of the profile is an easy, organized way to FOLLOW THE AUCTION!  There are a minimum of 4 trades in the above chart with asymmetrical opportunities for stop placement and targets based on just the key references from the prior day and the TPOs. The profile will keep you grounded, take your references one at a time, watch volume, watch tempo, look for acceptance or rejection at your references and… FOLLOW THE AUCTION! 

Click here for a link to the CME group 6-part study guide to Market Profile.

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Have a great week! Trade smarter, not more often!