Hey Traderade Family, hope you've had a relaxing weekend away from the trading screens! We finally got some nice weather in my home state of Michigan, so like every Michigander I spent most of the weekend outside doing yardwork...needless to say I'm excited to get back to the trading desk and dive into the charts. :)
It's time again for everyone's favorite trading week: Options Expiration Week! (deep sarcasm...I hate OpEx week). If you've followed my work for a while you'll know this isn't my favorite week to trade. OpEx week tends to product some wacky price action, and considering liquidity hasn't been great as it is, I expect this week to be fairly wild.
Truthfully, I'm hoping this week provides some closure to the recent volatility & hedging we've seen across the board. If you remember a few weeks back Mayhem and I talked about looking for the hedges to roll off post-FOMC...well they didn't really, and the market volatility continued. It's not uncommon for larger participants to enter OpEx week hedged, so I'm personally hoping to see a lot of those downside hedges roll off by the end of this week allowing for some bullish low-volume trading.
"Wait, did you just say you want low-volume?"
Yes actually, I do. It suits my intraday trading style a lot better.
"But I thought you said liquidity has already been pretty bad?"
Yes, it has. Allow me to explain. I've been talking about the aggressive buying I've been seeing for the past couple of weeks and I think that's been confusing some people. There has been aggressive buying, yet liquidity remains pretty bad because the aggressive buying is clearly institutional, meaning they have been doing it via iceberg orders in sizable quantities. Most iceberging happens at round numbers, level the prices in between vulnerable to violent rips/dips. This creates the scenario I described: Relatively high volume but poor liquidity, because price rips around until it finds a round-number (e.g. ES_F price levels that end in 0 or 5) where the bigger players want to transact (Side Note: If you follow my Twitter account, it's been pretty clear to see that the Resting Limit Orders we view through Bookmap have been incredibly helpful recently). If you're bullish, in my experience, what you want to see is aggressive accumulation from larger players on high volume followed by a steady grind higher on low volume. Well, we've just seen the first part of that equation, but don't take my word for it, let me show you through the charts:
The Numbers Bars Calculated Values Indicator at the bottom of the 30min ES_F chart above essentially shows statistical outliers in buyer aggression. Typically a Red or Blue bar signals a change in short-term momentum. As you can see from the chart above, the buyers seem to have failed...they were not being rewarded for their efforts. However, after punching down into the 3800s, momentum may now be shifting in the Bulls' favor. We talked about this flush down to the 3800s last week:
Isn't it crazy how well basic Technical Analysis works? I've had these simple lines on my Daily ES_F Chart for a while now despite all the volatility the S&P500 has been trading very technically. We saw an absolutely perfect bounce off that steepest declining trend line last week. Even though I traded it very well and was quite pleased with myself, truthfully I would have preferred to see RSI venture into oversold territory to confirm the bounce...but beggars can't be choosers I guess. NOTE: That same S/R Line that helped us short into the 3800s will be ~4100 on Monday, so be looking for that level to provide some resistance for ES_F.
Ok, back to our conversation about the aggressive buying we saw...here's another view of it:
This 1hr ES_F Chart shows the Delta by Price from April 1st - Present. If you remember last week's Market Prep article I talked about those two white lines roughly representing the aggressive buying zone...meaning if the buyers lost that 4145 lower level it could result in a significant puke to the downside...I think almost 300pts lower qualifies as a "puke".
But after that first ~100pts things got interesting...they started aggressively buying again. How do we know that? Look at the sea of green Delta prints in that area...again. (If you're new to trading, Delta by Price essentially shows us aggression by calculating the Bid Volume - Ask Volume at a specific price level, i.e. who crossed the spread to make the transaction). Not only did they start buying again, but they bought A LOT of contracts at the offer.
(Note: The LOL on the chart is just me laughing at whatever moron sold 2001 contracts into the lows...ouch.)
If you've followed my work for a while you know there's certain charts I like to reference every week to help guide my trading, and long-term Delta by Price is definitely one of them. I can say with confidence, the chart above represents some of the most aggressive buying within a two week span that I've ever seen from a Delta perspective.
So please, whatever you take away from this week's article please learn to ignore the FinTwit bullshit about "Everyone's bullish so the market can't go up" or "Everyone's bearish so the market can't go down any more" and simply start looking at the facts instead.
Here's the facts, my friends:
- Large players have been aggressively absorbing and initiating
- Volume is either going to die down, resulting in relief rally and they'll be rewarded OR they will once again be forced to liquidate if the sellers apply the heat
So how do we play this? Just like last week.
I am only interested in bearish trades if we're below 3950. Above 4015 and I think the bulls have the upper-hand and I don't want to fight against all of their recent hard work:
The 2hr ES_F Chart above shows evidence of a potential Hard Bottom as well as a nice Volume Taper on the YTD Volume Profile. We also see a prominent POC from last week at 4015. You may have to squint a bit to see it, but there's a bearish volume shelf culminating at the 4015 POC from last week. Why does that matter? Because it made for great short trades below it once it finally broke; however; now that we're above that level again I'd consider that a big win for the bulls.
I still think 4145 is a key natural pivot for bullish swing trades, but if you're a day trader there's a new level worth mapping out on your charts:
For me, 4050 unlocks the potential for further upside...and as weird as it sounds I'd love to see that upside come on low-volume to confirm the move. We have a nice little collection of POCs between 4020-4040 from last week, so clearly auction participants were interested in positioning there. I want to give myself a little breathing room now and would prefer to see a break above 4050, then a retest of 4050, then a rebid...that would be a dream scenario if you're a bull. It's also worth noting that we saw bullish overnight activity return last week for the first time in a while. Again, that's a win for the bulls. It wouldn't take much research to see that the most constructive stock market gains over the past couple decades have actually come from the overnight sessions.
So we've come full circle now, back to my thesis about looking for some low-volume bullish activity. The blue Relative Volume candles on that chart above show the recent high volume run we've seen and I think we're due for a breather. We're also peeking above a declining channel that I think is important for ES_F. As long as we can stay above I think a trip back to our favorite Chop Zone between 4265-4420 is in the cards. The first LVN Decision Zone to get through is around 4080.
Keep in mind it is OpEx week and a lot of wild stuff can happen. My pivot for the week is 3975. I'm giving the nod to the bulls here to see if they can defend that rebid from 3980 we saw on Friday.
Other Key Levels/Extensions:
4333
4213.75
4094.25
3796
3736.25
3675
3617
I sincerely hope everyone has a great trading week. Thanks for being here and thanks for reading!
Happy Trading,
Horse