(Disclaimer: I’m not the best writer but hopefully having a role on sub stack will improve my writing skills so bear with me)
hi friends,
We will be going over my interpretation and perspective going into and during Friday’s session (1/14) but first, let’s have a refresher on the context going into Friday.
Very obvious toppish signs on the s&p seen through the look-above-but-fail-to-hold-ATH structure from last weeks followed by a continuous feed of poor breadth.
$BTC seeing what many thought to be and may as well still be a ‘dead cat bounce’ (DBC)
All rallies have been sold, fair amount of selling seen on the tape that streamlined into next-day sessions
Friday, end of week, probable many individuals do not want to be holding overnight into a Friday especially a 3-day weekend
4650 pivot once demand now overhang
Session going into January MOPEX & into February volatility seasonality
JPM disappointing earnings from market reaction, banks moving lower
The list goes on but as you can tell, mass confidence was heavy bearish that persisted for the majority the week and to their defense, they have every evidential reason to believe so because of the evidence painted.
I always like to tell myself, “But it’s never that easy right?”
In my opinion, especially in this type of market environment, it’s dangerous to be with what the masses, even if it means to lose potential alpha here and there.
This type of environment is where trade location is to be prioritized, where risk is managed properly as volatility can easily sweep you away if not respected but I digress let’s get back to the details.
With the context above in mind, I want to shed light on the market internals at the open for additional information of the market’s health.
I’m not going to go into too much detail of what every technical piece means as those are subjects that deserve their own post.
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Everything listed is the main bundle of evidence collected.
I will tie them all together afterwards.
Here is a diagram of $ES as a reference for the day.
As you can see, overnight inventory is approximately 90-100% net short in the time-frame of 5:30-6:30AMPST (basically inventory from the overnight session sold off prior to regular trading hours [RTH])
Overnight inventory is where price has spent majority of its time relative to prior day’s close. When overnight inventory gets to about 80-100% on the extreme, there’s a 60% probability of a counter auction. This is why you’ll tend to see prices move upwards for the first 5-15minutes if there is a big sell overnight as the overnight inventory is 100% net short and you’ll tend to see those participants covering their positions & vice versa for 100% net longs.
$TRIN - ratio of # advancing & declining stocks to advancing & declining volume
anything around 2 is quite extreme, around 1 is mildly extreme
(positive trin = decliners > advancers, negative trin = advancers > decliners)
$TRIN opened down at the open and the range is much lower than it was the prior day as you can see by the read of 1.96 Thursday & sub 1 on Friday. Relatively, the read isn’t quite extreme as it was from Thursday.
$ADD - advance/decliners showcasing # of stocks participating in an uptrend or downtrend.
At the open, there is a bounce-uptrend move for advancing stocks and fades towards the tail-end of morning volatility, which coincides with the overnight inventory mentioned above.
$VIX - volatility measurement
17-18 range has been a pivotal area for some time.
$VIX was forming a base around 18 for an upward move (which coincided with the market context) but there was a chance it could have been a grab of liquidity half back before tracing back lower to retest 18.
Large caps
$AAPL - opened back into prior days value area, lower end of range is 172 where 170 is a psychological pivot.
$TSLA - Same upward thrust in price action at the open, hugged above vwap for the majority of day but did not reclaim prior day’s value area like how $AAPL did.
1030 has been a pivot for some time as well as big 1000 so those are 2 levels of significance.
Market Profile
On the left hand side, you can see that the overnight (OVN) low was around 4606, which was one of my big levels of interest which I’ll get into later.
But the idea with this overnight low is if prices are unable to sustain a move lower under the overnight low, then there isn’t enough supply for lower prices.
As you can see with the diagram(1) underneath, we have printed only 254 contracts whereas the value area above (diagram 2) has a range between 1-8k contracts.
This number signifies popularity in price, where only 254 contracts traded at 4607 = very little time spent at 4607.
Going into the session, I had a 4650 as a primary level as it was an order flow area of interest for prices to hold as well as an area of where the structure begins to break down if prices began to offer lower.
4606 is tagged as a ‘reference’ level as many of the levels I leave in the chart are ‘important’ levels as the market tends to have ‘level memory’ from my observation. And this particular level coincided with the OVN low & psychological 4600.
If 4606 were to implode with confirmation on the order flow, then we would look lower down towards 4600 & 4580 .
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Diagrams and/or video evidence that I’m unable to add into this are the DOM & tape so bear with me but here is a snapshot of what my DOM looks like (I use jigsaw).
Now that we have the majority of the contextual clues for the day, let’s begin to tie them together. This is where I’ll be actively monitoring the lead indicators mentioned above as well as what the DOM & Tape are reading to glue together the picture.
The tape agreed with the bearish sentiment for the first half of the session and after the short-covering rally at the open, prices had no sustained buyers to hold their bids at higher prices and thus the attempt to run it under the overnight lows began.
Cumulative delta read had been around -28k-30k for this duration whereas cumulative delta = market buys - market sells. The more negative read of delta, the more market sells & vice versa but just because the delta read is positive or negative doesn’t tell you the full story (need to tie this with context price & tempo).
The delta read has been predominantly present of market sells over market buy orders for couple sessions now & there was confluence with context & price action, thus leaving a visible quantification of mass shorts in the market which supports our thinking that many want to see this lower.
Nothing too interesting on the DOM, yet.
Seems like doom & gloom amidst mass panic right?
JPM earnings was the primary catalyst for the shed in the markets but this is where it gets interesting. Banks have been running for weeks now with technology continuously bleeding.
With banks now seeing cash rotate out of them, where is it going?
Out of the market or into a different sector?
This is where $TSLA and/or $AAPL comes into play. If there was indeed true sell in the markets, then I would need to see $TSLA and/or $AAPL sell with confidence under their big pivots. But until they do, we are at the extreme end of the lower end of the balance.
As you can see, TSLA remained bid around and above vwap for most of the session while JPM remained offered below vwap for the majority of the session.
Monitoring these 2 names is the real-time indication of validating or invalidating the rotational thesis, which at this point, validated my thinking as long as TSLA > vwap & no close under 1000
Tech earnings are also nearby which tends to hold a bid in the market.
This is where it gets interesting.
The market had an attempted move to break the OVN lows, which it did but only by 2 ticks. Likewise, only 401 contracts (40+361) transacted at the lows, once again an unpopular price for now.
In box [1], you can see the attempt to break the 4606 lows from a candle perspective.
Between box [1] & box [2], you can see prices rotated back up towards 4620 as old shorts and/or new shorts fomo chasing the lows began to cover as prices were unable to sustain lower.
In box [2], you can see the tag of intraday vwap and a reattempt to break towards lower prices seen by the big red candle at 4620 but now 4620 has become support.
What is not highlighted in box [2] are 2 things
Delta read at the time was unwavering, still remained unchanged at -30k
DOM began to show bids reloading, absorptive behavior
Subtle developments in the beginning but snowballed into a larger presence as time progressed.
Now with this new development with an hour into power hour, there were signs that this was a setup for a rotation back higher because the inventory into the close is now heavily comprised of net shorts rather than net longs but only as long as 4606 held.
There was a fight as we continued to climb higher from 4620 to 4630 & 4630 to 4640
then 4640 to 4650, each attempt to push prices lower was absorbed on the DOM. At this point, there was an absorptive change in the DOMs behavior.
Remember, trading is all about change.
Now you can see that this is the shift in the tide, where longs trapped this morning are now shorts trapped into the close. And when one begins to cover, it causes a domino effect especially in these types of situations.
In box [3], you can see that effect when prices began to become accepted higher and higher while monitoring the DOM, tape, price, and TSLA for continuation.
We closed > 4660, tagged 4667.50 (my initial target over 4606& 4620).
The less obvious move now obvious.
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Collect evidence, scan for clues & monitor for development to validate or invalidate workable theses.
There are a lot of sub topics embedded in this post that deserve their own post but I don’t want to make this post longer than it should be.
I decided not to explicitly give every nitty gritty detail of the development for the day but rather the main focal points that built up a narrative in the market.
The markets are always run on manipulation and the gloom and doom story combined with the divergence in delta and changes in DOM behavior was a recipe for a probable end-of-day short cover rally.
This is where combining quantifiable & unquantifiable variables make up a narrative.
For future sub stack posts, I’ll look to collect real-time recordings and images to provide visual imagery.
I hope this post shed light on my intraday thought process.
If you have any questions or concerns, feel free to post it underneath.
Thank you for reading :)
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Thanks Chika, very interesting post. This is really helpful and teaches how to see the big picture and make a history based on that.
Now I see that we have to be looking for different clues instead of focusing in one chart
Thanks again
Every time I hear lyric "what's going on in that beautiful mind" I think of @chikatrades. Thank you for ☝️