Tuesday 27th August – ES_F Review

Morning traders,

Really nice trading day yesterday, as expected a balancing day but also an ‘inside day’ (an inside day is where the entire range of a day is inside the range of the previous day). Now, given the extent of the sell-off on Friday last, it was highly likely that we’d stay within that range, but *where* yesterday’s range traded is important MGI to carry forward. Jim Dalton & Peter Reznicek talk about context all the time, and the context we need to be mindful of here, is month end. For retail traders, month end probably means very little, however, for big institutions & money managers, month end is a big deal, and let me tell you why – simply put, at the end of every trading month, institutions & funds will prepare a report for their clients on their performance for the previous month and how the portfolio of stocks has performed. Any opportunity to bid up the market approaching month end will likely be taken, to ensure the best possible results are presented, so the clients send over even more money!

Yesterday told us a lot, in terms of how the market traded in a balanced zone between 2855-84 in a really orderly fashion. Personally, I love days like that because the price action is unlikely to give me heart failure. After the cash open, we traded down to Friday’s settlement price @ 2855 and only had 2 ticks below it, there was no one there with any significant size to push it down. That told me that the people in the market, are most likely technical traders in a short time-frame. Looking at the profile chart below of the last couple of weeks, it’s important to note some key levels – the 2850-55 levels (highlighted in the green boxes) have a collection of daily VPOC’s, meaning the market transacted a lot of volume there. Failure to take that out yesterday, and drive lower, is somewhat bullish in the context of month end. We also closed out on the highs which is another signal that goes some of the way towards confirming this.

Overnight, we’ve got an inventory that’s mostly net-short – but price is holding above yesterday’s VPOC @ 2868. Typically, when the cash market opens, it’ll try and correct some of that inventory. Take yesterday for example, when the market closed on Friday (on lows), market makers will need to buy up the inventory – then when the market opens up higher, they need to get out which is the selling we saw off the open. Conversely, overnight last night, inventory is mostly short, so we may see buying off the open as these guys get out of their positions. Now, we’re still 4+ hours away from the open, so a lot can happen in that time-frame, especially if a certain individual is let loose on his Twitter account!

In the context of month end this week, we expect the single prints from Friday’s sell-off to get taken out at some point this week (green zone highlighted below). 2906.25 acted as a great support level over the last 10 days, so it will be interesting to see how the market reacts when it’s tested from below. We also have a poor high on yesterday’s profile (c.2884) so it should be expected that it gets taken out during RTH at some point. To the downside, there’s a very small gap from Friday’s close up to yesterday’s open (4 points) which may get closed.

Keep an eye on our Twitter account for updates throughout the day.

Happy trading & stay safe out there!