Smash ES Plan | December 21, 2022

Short-covering rally today after the weakness in the ON session found responsive buying, 3 handles shy of the last downside target.

Can buyers take advantage of this upside imbalance or will sellers ruin the party?

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Recap & Plan

The ON session tested Smashlevel 3856 (ONH: 3854.75) and notice how the buying shut off and a poor high formed. Poor highs and lows are simply crowded traders that get stuck at bad location and the initial reaction is always away from that area to stop them out. We had three period highs close to each other and observe the liquidation break that followed, stopping those traders out. That liquidation cleaned up the unfinished business we left from prior day’s session. Clean up of poor structure only counts during RTH, but we can’t completely ignore it if it happens during the ON session. We have seen tops and bottoms form (at least short-term) during the ON session countless of times, including the recent high from 12/12 session. Sometimes a clean up in ON is not enough and the RTH session needs to do it as well, like today’s session for example. We tagged the weekly NVPOC 3815 in ON, which also is the Monthly Extreme Low for December. I mentioned this in the daily plan that was published for the 12/12 session. The ON low was 3803.50, meaning 3.5 handles from our last intraday downside target, which provided a decent reversal. Very nice action during the ON session, how many of you actively trade the ON/ETH session?

The RTH session opened below prior day’s value area and after trading in and out through the open level, we got a minor liquidation. That liquidation did the exact same thing as the ON session, meaning we cleaned up yesterday’s poor low and we closed the daily gap 3825.75. The last few sessions, sellers got a pretty decent follow through when they cleaned up poor structure that was left behind, but not today. That was a nuance, a change of pattern. There was no interest testing the ON low and we quickly traded back within prior day’s range with significant aggressive buying taking place, refer to the delta bars to the right from the turn. That reversal formed an excess low, which unlike poor high and lows, is a potential completed auction. Remember, excess marks the end of one auction and the beginning of another. Buyers want to be responsive within that excess, should it get revisited.

We end up with a p-shape-ish profile, indicative of short-covering with an excess low and unfinished business at the high. As you may have noticed, buyers were more active on dips today compared to recent sessions and much of that confidence comes from the fact that we had a properly auctioned low today, meaning a good foundation to lean on. We did discuss the potential for sellers getting a but tired in prior plan and today, the value is unchanged. That doesn’t mean that the downside is over, we are still one time framing down on the daily, meaning sellers remain in control. P-shape profiles in a downtrend usually weakens the market as it removes potential buying interest and gives stronger sellers better prices to short, so today’s main distribution is of interest short-term. Sellers don’t want to see any price exploration above today’s main distribution, which can potentially trigger more short-covering.

Two additional VIX levels to observe for tomorrow: 22.57 and 20.39. Use the levels as confirmation of strength/weakness. Should we break and hold above 3895, you want a see a VIX < 20.39 for confirmation of strength. Should we break and hold below 3800, you want a see a VIX > 22.57 for confirmation of weakness. In any case, one should be careful with chasing outside of the yellow levels. A non-cooperating VIX may suggest reversals (trade setups).

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