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Morning Es Trading

If you're shorting the current tape, you must be steadfast in your approach to risk and trade management. 
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Thursday's Market Review

For the E-mini S&P 500, Thursday's focus was on establishing value above the 1679.25-to-1680 area. As I discussed in Columnist Conversation late Thursday morning, that task was accomplished early on in the session. As you can see on the chart below, value was established at 1681.25 shortly after the regular session's open at 9:30 a.m. EDT. Moreover, it was this upward shift in perceived value that gave buyers the confidence to press their bullish bets.

E-Mini S&P 500 -- Five-Minute Volume Profile I

Source: eSignal

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What was an early tip-off that value was likely to shift higher? We continued to see every downside low volume node (LVN) bullishly rejected during the initial 30-plus minutes of regular-session trading. This bullish rejection encouraged traders to either sit on their hands -- if they were lurking short -- or to continue to press long-side bets if they were trading in the direction of the trend.

Suffice it to say that it's incredibly difficult for many to get long when prices appear to be surging higher. But, at the very least, if you'd recognized the early strength and migration of value above the 1679.25-to-1680 area, that should have kept you from initiating a short position too soon. 

Friday's Es Trade

With no economic reports scheduled for Friday's session, traders will have no choice but to shift their focus to our most recent corporate earnings reports.

E-Mini S&P 500 -- Five-Minute Volume Profile II

Source: eSignal

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Friday's primary areas of interest are expected to be 1682.50 and 1677.50, and we have a very wide low-volume area of rejection between 1679.50 and 1682.50. With that in mind, my baseline expectations are for more aggressive buyers to emerge as the Es holds above 1682.50, or for a notably more motivated seller to enter the pit as we trade back through 1677.50.

Prior to Thursday's late-session drop beneath 1682.50, the Es looked set to end the day within the session's 1682.75-to-1687.75 balance area. For those who didn't stick around for the 4:15 p.m. close, please note that the closing selloff was the result of disappointing earnings from both Google (GOOG) and Microsoft (MSFT).

Now, because the Es ended Thursday's regular session within the 1679.50-to-1682.50 low-volume area, our initial concern will center around buyers, and whether they're able to auction the contract back through 1682.50. If there's insufficient demand to recapture 1682.50, it's only logical to expect traders to sell the contract back down toward the 1677.50-to-1678 level.

Should the Es backtest 1677.50, my initial look will be toward a dip buyer. However, if we see any hint of failure from in and around 1677.50, I'd expect it to attract an increasingly aggressive band of short sellers. Continued selling beneath 1677.50 has initial support between 1672.25 and 1673, but my guess is that any sort of decent momentum would result in a drive through the low-1670s, and straight into 1666.25. As a reminder, those pining for a more enduring selloff need to see the Es slice through, and close beneath, the mid-1660s.

Since betting against the bulls has been an incredibly unprofitable position over the past three weeks, we have to have a plan in place in the event that demand returns above 1682.50. My initial thought is to ignore the LVN at 1685.25, and instead focus on the balance that will likely continue to build between 1682.50 and 1687.75. With that in mind, I believe any hint of acceptance above 1682.50 has the potential to result in an immediate squeeze toward the top of Thursday's 1682.75-to-1687.75 balance area.

As the contract extends beyond Thursday's upper boundary, scalpers can patiently search for shortable excess. However, do not ignore the fact that all trading above 1687.75 would paint a giant X on the big figure. Anyone shorting the current tape, be it from the position of an intraday scalper or swing trader, must be steadfast in their approach to risk and trade management. There's nothing wrong with fading the crowd, as long as you're not doing so from the position of an emotional and risk-seeking trader.

Current conversion formula: Es (September 2013 contract) value X .100255 = SPDR S&P 500 (SPY) Value

1687.75 = 169.20*

1682.50 = 168.68**

1677.50 = 168.18***

1672.25/1673 = 167.65/167.73*

1670 = 167.43*

1666.25 = 167.05**

1660.75 = 166.50*

1655.25 = 165.95**

At the time of publication, Byrne had no positions in the securities mentioned.