S&P and Context

I suggested a trading strategy on Friday before the market opened: buy a breakout of the 90 minute range if the open-gap failed to close in the first 90 minutes. What I’d like to consider today is why I’d sell the open-gap on Thursday and look to buy Friday’s.

The short answer is context.

Assessing context is a critical skill for a discretionary trader. In my view, it is a skill that is being lost. The fading of a gap-open is a well-known strategy for the S&P; but the question always is: is this the correct strategy to apply in this context?

On Thursday we gapped up 10 points from the Wednesday close at 4:00 PM EST. Note that the Thursday open was contained by the boundaries of congestion that had been established in the preceeding few days. Note also that as soon as the market opened on Thursday, we saw selling volume come in. 

The volume profile showed that the attempt to move higher from the open of 1474 on Thursday took place on non-existent volume and indeed, we saw no buying volume come in until 1471. This suggested that the market would extend the range of the initial balance to the downside – with a minimum target being the previous day’s volume value area at 1461.5 and the probable target being the previous days’ second standard deviation at 1458 to 1456.

On Friday. the market gapped 17 points from the 4:00 PM close. Such a strong open ought to have been met by strong responsive selling. Instead we had the reverse of Thursday. The initial down move in the “A” period (9:30 to 10:00 am) was on relatively light volume and this story repeated itself until the ‘J” period.  There was a distinct lack of selling enthusiasm.

The key differences between Thursday and Friday were:

  1. The location within the sidways structure that the market gapped into. On Thursday, the market gapped within the sideways structure and into the sell zone. On Friday, the market gapped above the sideways structure.
  2. The response as evidenced by the buying/selling volume on Delta. On Thursday, the responsive seller came in quickly; but there was no sign of the seller on Friday.

It’s important to note that there were important similarities on the two days: similarities that may be distiguishing differences next time:

  • The market was coming off a rejection low of the Primary Buy Zone
  • There short term behavioural parameters were giving buy signals
  • The Ray Wave was looking for a new high
  • The seasonal tendencies favoured a year-end rally.

Identification of an edge is important; but even more important for a discretionary trader is identifying the context that increases or decreases that edge.

4 thoughts on “S&P and Context”

  1. For a definition of ‘context’, please read post on Nov 12 2007:

    “I place great store in ‘context’; it’s the filter by which I judge my setups – the patterns that tell me when the probabilities favour a trade.”

  2. MERRY X’MAS, RAY, & ALL READERS

    X’mas Eve came and went with light trading volumes and early closure of the markets, sending traders to take a breather and enjoy X’mas spirit with their families, a good option taken.

    Adding to filters or ‘context’, I wish to add a newly coined term, ‘Agflation” (clever wordsmithing by Raymond James Chief Strategist.Jeff Saut-June 22, 2007).
    Quote:
    ‘This “agflation” has left grain prices at 10-year highs, stoking inflation fears in Europe and putting central bankers there on alert. Also adding to the agflation-agitations has been worldwide drought conditions….’

    HOWEVER, AN UPDATE ON June 22, 2007 8:17am showed:
    ” April 27, 2007 report from Merrill Lynch’s Richard Bernstein and Jose Rasco, titled “Global Agriculture & Agflation”
    Quote:
    ‘Food prices are rising, putting upward pressure on producer and consumer inflation. Agflation has begun.’ Unquote.

    Unless someone comes up with an earlier use of the phrase Agflation, authorship credit HAS to go to Bernstein and Rasco. (Sorry, Jeff).

    Would be a challenge for us to be a wordsmither of new economic terms to add more filters in addition to usual, such as seasonalities, etc, before taking a trade.

  3. Hi Jordan

    Thanks. In tradiional Mkt Profile, we use letters of the alphabet to denote the 30 mins ranges that construct the Bell Curve.

    In the ES, the ‘A’ period is the 9:30 to 10:00 am EST. The ‘J’ is 14:00 to 14:30

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