Non-Farm payrolls tonight. The forecast range is +110,000 to - 10,000 and the mean is around 85,000.00. The mean was around 65,000 to 70,000 until the ADP employment number last night. With that coming in at 189,000 (against the expected 50,000), the expectations have edged up.

In this post, I’d like to show the process by which I prepare for figure night. Figure nights have been my bane. It’s the time my ‘rat brain’ (using Dr. Janice Dorn’s label) is most likely to exert an influence. To counter this, I spend a lot of time preparing my responses to the figures; in addition, I make a commitment to adhere to the pre-figure plan. In short, it’s one of the few occasions, I don’t give my intuition a look-in; at least not until at least three or more hours have passed.

The first thing I do is the normal analysis - as if there are no figures coming out.

Right now, I am long with expectations that the market will make a new high. I intend to cover the longs on new highs and stand aside after that. I outlined the fundamental reasons why I think the next high will mark a 2-year high in the post “Fundamental or Technical Trader?’; add to this the position of the market on the Ray Wave structure and it makes holding past new highs a high risk trade

In the meantime, using a variation of the Rule of 3, I have closed out 1/3 of my open positions, brought the stop to breakeven on 1/3, and for the remaining 1/3, I have my stops in their initial location. The profits I took will cover the loss on the 1/3 initial stop so I am on a ‘no-loss of capital’ situation.

So the above is where I stand at the end of the normal analysis.

After the usual analysis, I prepare my responses to the figures. The attached Decision Tree shows the probabilities as I see them and they show scenarios that are too close to call.

The events I considered:

  1. The ADP numbers have a terrible record for forecasting the Non-Farm numbers but they were so skewed, we may see a higher number than expected.
  2. On the other hand, John Williams’s excellent site had this to say: (http://www.shadowstats.com/cgi-bin/sgs):

“Employment Numbers May Play Role. This Friday’s employment report could be used to decide or at least to try selling any forthcoming rate action or lack of same. Fundamentally, the numbers should be horrible; October help-wanted advertising sank anew, while jobless claims continued to rise“.

So the first thing I decided was I wouldn’t be doing anything in the ES immediately after the Figures. If they come out within the range +100k to +10K, I’ll call it a night for the ES. If they come in at either extreme, I’ll be looking for a sell-off and then signs that the sell-off has failed.

The sign I’ll be looking for is an ‘open-gap’ down at the open, followed by a failure to close 50% of the gap in the first 60 minutes. The hourly close would need to be at least around the 50% of the hourly range and preferably at or below the lower 33%. I’d then look for an upside breakout of the hourly range.

On the breakout, I’d need to see Market Delta confirming breakout volume.

decision_tree.jpg

DECISION TREE

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