ES Daily Plan | January 23, 2023
The market structure on Friday was poor due to the vicious short covering rally, which left five sets of single prints.
I'm observing if there is any short-term interest in technical fills of that structure.
Recap & Plan
On Friday, the ON session traded within the range of the previous day's value area. The upside was capped by Smashlevel 3932 (with ONH of 3933) and the downside was capped by the prior Weekly Extreme Low of 3910 (with ONL of 3911.75). The first rejection of 3932 occurred in conjunction with the opening of the European session, but the second rejection, which occurred before the regular trading hours (RTH) open, was much cleaner in terms of orderflow, where we could clearly identify aggressive sellers coming in and confirming the rejection.
Friday’s RTH session opened slightly below 3932 and we saw an attempt from sellers to take out the ONL, but it was unsuccessful. The LOD on Friday was 3912.25, which once again respected the 3910 level, posted last Saturday. Friday’s session was all about the prior 5 day balance low. As stated in Friday’s daily plan, sellers were maintaining control below, while buyers wanted to establish acceptance back within the balance range to trigger a potential short-covering rally. The single prints that formed already in B-period were suggesting a potential attempt by buyers to test Wednesday’s prices of the spike down. Buyers managed to close the daily gap and basically tagged the last intraday upside target 3956 in E-period. Observe the distribution that was formed within the prices of the spike, and the poor high that was developing. In the H-period, we observed a liquidation break that was quickly taken advantage of by dip buyers, indicating that the drop was due to weak-handed poor location longs getting shaken out rather than any stronger sellers entering the market. Note where the H-period stopped, exactly at the previous day's high (to the tick). That is something that wouldn’t happen if we were dealing with stronger sellers. Carry forward that low as weak. However, that drop was tricky because VIX was trading above 19.54, indicating a lack of confirmation of strength.
Keep in mind, the correlation between ES and VIX is simply a tool for context that traders can use alongside their own trading strategies. Friday’s short-covering rally had a VIX trading above 19.54 the whole time, making it very tricky to chase. Being cautious about chasing long positions doesn’t mean that shorting is the alternative. We were aware of the possibility of a short-covering rally in case of the market returning to the prior 5 day balance. and the H-period failure to the downside was a warning to be cautious on the short side. I usually don’t initiate trades outside of the intraday targets, regardless of VIX. As a result, I may miss out on some moves, but I’m comfortable with that. I would rather miss out on a move like that than chase at a poor location without confirmation. There is always another opportunity in the next session.
We ended up with a pretty significant short covering rally, and as a result, we left behind very poor structure. 5 sets of single prints in total. My level of interest short-term is 3978, essentially the support of the upper distribution from Friday. The highlighted poor structure may get some fills, so be careful to mistake any early weakness for stronger sellers, as it may just be technical fills. Keep in mind that we have trapped sellers there, so it’s not an area where you want to initiate shorts. I’m cautious with shorts until acceptance is established below the “Battlefield”, which would negate Friday’s rally. In the absence of interest in fills, the upside target will be the other side of the prior 5 day balance, cleaning up the poor structure from 1/18 in the process.
Tomorrow, pay attention to two additional VIX levels: 20.80 and 18.90. These levels can provide confirmation of strength or weakness. If we break and hold above 4031, a VIX below 18.90 would confirm strength. If we break and hold below 3943, a VIX above 20.80 would confirm weakness. Overall, it's important to exercise caution when trading outside of the highlighted yellow levels. A non-cooperative VIX may suggest possible reversals i.e trade setups.
Be sure to check out the Weekly Plan, which provides a broader perspective and highlights significant levels of interest to watch in the coming week.
Disclaimer: Futures and options trading involves a high level of risk, with the potential for substantial losses. The information provided in this newsletter is for informational purposes only and is not intended to be a trade recommendation. It is the responsibility of the reader to make their own investment decisions and they should seek the advice of a qualified securities professional before making any investments. The owners/authors of this newsletter are not certified as registered financial professionals or investment advisers.
Twitter: @smashelito | FAQ: smashelito.com
Thank you for this, as always. Quick question: have you touched on how the relevant VIX levels are derived, relative to levels of interest, in a prior post? Would love to have more insights into how you're assessing implied vol vs. market profile. Thanks in advance!