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ES Daily Plan | January 26, 2023
Trading is adapting. With market conditions constantly changing, one must be able to adjust accordingly.
From a sell the rip night and morning to a vicious rally, and we end up back where we closed the previous day.
Recap & Plan
The ON session was intriguing. We saw a reaction to Microsoft's earnings report in after-hours trading, but this move was quickly retraced at the start of the ON session. The Smashlevel 4040 saw continued selling pressure. The retrace saw us traverse a significant portion of the inside day's range. Before the start of the European session, a b-shaped profile formed, but after buyers were unable to find acceptance back into the prior day's value area, we broke down from that distribution. This led to a break of the inside day to the downside. After the breakdown, sellers effectively defended any attempts to return to the prior day's range for a few periods (creating short setups). Eventually, the market continued to move downward and we tagged and exceeded the last intraday downside target of 3996, with VIX confirming weakness. VIX did give us some clues before the break of 3996. I will post a visual showing the correlation between ES and VIX, as well as a review of my only trade on Substack.
The RTH session opened with a true gap down, and we were aware that VIX was signaling weakness, which is a significant piece of information. Trading below 3996 with VIX above 20.05 was indicating caution with counter-trends, as discussed many times. Unsurprisingly, rips were sold for the first three periods. We cleaned up the poor structure from 1/20, but only partially, forming an excess low in C-period. The fact that we only partially filled that poor structure was quite bullish, because with the confirmation of weakness, stronger sellers would have no problem to fill that area, indicating that the liquidation break was potentially caused by weak handed longs rather than stronger sellers.
In uptrends, liquidation breaks often strengthens the market by eliminating weak long positions, potential sellers and drawing in stronger buyers at lower prices.
It's possible that today's drop is what stronger buyers wanted to attempt to resolve the unfinished business we have carried forward at the highs. Note the delta profile and the amount of aggressive buying (blue) at the lower half of the profile. Buyers managed to close the gap and regain 3996 in E-period, while VIX dropped below 20.05, which implied that weakness was no longer confirmed. This “shift” suggested that the initial "sell the rip" strategy was now difficult to maintain. Very important market generated information, which we have to adapt to. Always adapt. Again, visuals of this will be on Substack. The only trade I took was the pullback to 3996 after it was regained, with VIX holding below 20.05, and I managed to ride a good portion of it back up the the Weekly VPOC. Once again, VIX gave us some clues before the impulse move that regained 3996.
We ended the day with a double distribution trend day to the upside, with one set of single prints in H-period. The question remains, was today's liquidation break what buyers needed for an attempt to reach new highs? I will continue to closely observe the 4040 level and be cautious on the short side if we break above and hold above. There should be plenty of stops above the red resistance area. Sellers obviously want to continue to defend that resistance and establish acceptance back within today’s lower distribution, which would negate today’s closing move. Remain flexible and keep an open mind. What works for a few hours may not necessarily be effective for the entire session. Today's market conditions serve as a prime example of this.
Tomorrow, pay attention to two additional VIX levels: 19.96 and 18.20. These levels can provide confirmation of strength or weakness. If we break and hold above 4084, a VIX below 18.20 would confirm strength. If we break and hold below 3985, a VIX above 19.96 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.
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