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Market Prep: Week of October 11, 2021

Updated: Nov 3, 2021

Happy Sunday, I hope everyone had a great weekend and was able to spend some time with family, friends, and away from screens! It's time again to prepare for the week ahead, let's dig in. What was our theme last week? Range trading. What did we see last week? Range trading. What do I mean by that? It's basically when you see the market make a large move at the open, then digest it and move right back. This kind of action frustrates the hell out of the Robinhood YOLO gang and I love it. RIP your theta, you terrible traders. For us, range trading means recognizing early that the market will likely be doing some digesting from a longer-term perspective, and profiting from that by patiently waiting for our areas of interest to be reached so we can do our best to ride the waves back and forth. I've always looked at it like this: A market is either in a state of rest or a state of motion. The purpose of doing this weekly trade prep is to try to identify which state we're likely to be in and adjust our trading strategies accordingly. Example, if we think we're going to be in a state of rest (or "digestion") then prepare for range trading and get ready to flip-n-reserve. If we anticipate a market in motion, brace your self to play breakout trades and hold that position with a clenched butthole. So let's look at last week:

Looking at the Daily Chart on the right, we're clearly still chewing on some recent volatility. In my personal opinion, given the uncertainties with debt ceilings, tapers, etc., the market is trying to make up its mind. Because I suck at macro, I'd like to let it make up its mind before I put any longer-term trades on. Will I miss the beginning of the breakout? Maybe. Probably. But that's okay with me. As I said last week: If the "big boys" don't know which way we're headed then why should I? I am remora.

So I'm gonna stick to what I do best and focus on the week ahead...let's get more granular now.

Even though the market didn't seem to do much during Thursday-Friday, I think what it did do is still significant. The fact that we didn't head back down to the lower range on Wednesday afternoon & Wednesday evening was interesting. We spent Thursday/Friday digesting that move, building out volume in the 4390-4400 range that was a previous Low Volume Node (LVN). While that wasn't a surprise, it definitely balanced the volume profile from a long term perspective (see far right). Remember last Sunday when we talked about that little "Face Ripper" Zone from 4410-4425? (Those were free points during Thursday's opening drive by the way). Remember how we said that zone would open the door to 4440 real fast? Yeah, didn't. We saw an important new High Volume Node (HVN) develop, where sellers said "gtfo" and did not allow the buyers to reclaim 4440. For me, that reinforced the importance of that area. If we breach 4425 now, I will be leaning into longs HARD. Meanwhile, the bottom of last week's Volume Profile isn't pretty. The bulls would rather see a nice clean taper. Instead we have a little pig-nosed flat bottom. What does that tell us? A lot of activity (volume) happened at the lows...repeatedly. In other words, sellers were trying to break the lows. Why don't I love that? A nice long, clean taper tells us buyers & sellers agree that price sucks down here...but we don't have that friendly agreement here. Instead we have someone soaking up a LOT of selling in that 4270-80 range, and if we test that area again it's likely the buyers could puke that position making for a violent move down. We've knocked on that 4270-4280 "door" 3 times...remember what Horse says about door knocking...

If you remember last week, one of the reasons for my thesis that we'd be range trading all week was the noticeable lack of institutional interest from an iceberg perspective. We did see some iceberging this week at 4305 & 4310. Naturally, I expect those to be important levels going forward. If those positions are puked it could accelerate the scenario mentioned in the previous paragraph. For now, there's no reason to think that the big boys wouldn't defend that area.

Over the past couple years, it's rare that ES_F get's to interact with multiple key Daily Moving Averages (DMAs), so I would be remiss not to include the above chart. From a longer term view, holding the 100DMA is quite bullish. We're currently battling the 20DMA, but keep your eyes on the 50DMA. If the bulls can reclaim and hold 4440 that would be turbo bullish. If you're a scalper/daytrader like me, you should absolutely have these key DMAs on your chart while trading. They move around (obviously) so know where they are at all times, there's often great scalp setups that present themselves in the form of bounces/rejections. Before anyone asks, I only care about the DMAs on the chart above. Why? Because those are the only ones the market cares about. Nobody gives a shit about your 23 EMAs or 69.420 DMAs. Focus on the DMAs that the market respects...the rest is noise.

Getting more granular now, I will be using 4345 as my pivot level for the week ahead, meaning I'm interested in longs above that level and shorts below. I'm keeping 4390 on my charts because I still think it's important and any trading above that level is a green light for longs. Also, remember that resistance becomes support (and vice versa), so that 4346.25 area we were shorting off last week will now likely provide some nice long entries because we've reclaimed it and built volume above it.

Final Thoughts

It's Options Expiration (OpEx) week. Unless you've been living under a rock, you should already know that volatility is in store for this week. No, I'm not necessarily talking about the VIX, but general volatility in the way ES_F will trade within each session. Dealer positioning and the options market continues to play a dominating role in the markets and OpEx week gives them center-stage to let their inner freak-flags fly. If you're new to trading, OpEx week is a great time to sit out or trade very small. Whiplash to be expected. Based on the market action post-Covid Crash during OpEx week, I tend to favor shorts from Tuesday-Friday morning, and see no reason to change that strategy unless we see obvious bullish trend days or we're way above the weekly pivot. If you do some research, you'll see why I favor that strategy during these critical weeks. HOWEVER (and this is a big however), this OpEx week is not like the others in the sense that the market has already taken quite the beating in recent weeks. I am very curious to see how this week shakes out, but will still remain focused on short-duration scalping instead of larger/longer positioning. I'd rather enjoy watching the action from the sidelines than get steamrolled trying to trade a directional bias this week. Yes, we were range trading last week...but I think this week puts and end to that chop and we're likely to see a market in motion by this Friday/Next Monday. Stay safe out there this week, friends.


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