Observe if we accept or reject the higher prices of the spike and keep an eye on the inside week extremes.
Recap & Plan
Buyers were unable to break and hold above Friday’s Smashlevel 3875 (ONH: 3871), meaning Thursday’s P-shape profile failed to attract new buying interest in the upper distribution. This essentially trapped the late buyers who were forced out of their positions as we slowly started cleaning up the poor structure left behind behind by Thursday’s short-covering rally. Prior to the Europe session, the single prints dividing Thursday’s double distribution had already been filled, and we were back within the lower distribution, which was sellers main objective.
RTH session opened in the middle of Thursday’s large A-period excess, and we actually fully retraced that excess during the first 30 minutes of trading (A-period). One interesting nuance during the A-period low was that we hit the VIX resistance level 22.36, and ES found buyers. A recap of the correlation between ES and VIX on Friday was published on both Twitter and Substack for reference. In the recap, you will see how Friday’s last intraday downside target 3822 was hit, almost to the tick, while VIX did not confirm weakness, indicating that it was a poor location to initiate new shorts, as outlined in prior plan. During that sequence, there was heavy aggressive selling that was absorbed by passive buyers, which is exactly the kind of activity you would expect to see in the event of a potential reversal. To summarize: We knew the location was not favorable for shorting and we got heavy aggressive sellers unable to move price lower. This was followed by aggressive buying, resulting in a squeeze.
We end up with a ~40 handle reversal and closed out the session with a spike up with spike base 3854. For tomorrow’s session, we need to observe if the market will accept or reject the higher prices of the spike. Trading within and above the spike (Acceptance) is a more favorable outcome for buyers, while trading below the spike (Rejection) is a more favorable outcome for sellers.
Daily is in a 4 day balance and weekly is technically still one time framing down since inside week’s do not end it, but the last two weeks have shown a clear pattern of consolidation. The main focus is on the extremes of the inside week (blue box) and if we see a breakout of that range, we can expect to see a move towards the extremes of the week before last (pink box). It's likely that a larger directional move will occur once the market auctions outside of the extremes of the pink box. Note the confluence with the last intraday upside target 3913, the MA50 and the top of the pink box.
Tomorrow, pay attention to two additional VIX levels: 22.60 and 20.74. These levels can provide confirmation of strength or weakness. If we break and hold above 3913, a VIX below 20.74 would confirm strength. If we break and hold below 3815, a VIX above 22.60 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 Outlook, 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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