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In this post, I’ll conclude the series on the Market Profile analysis.

Yesterday I wrote in relation to the Directional move from the ‘E’ period on Feb 6:

1. “Is the move from ‘E’ the start of a new Initial Price Movement down or part of a rotational process?
2. If a new Initial Price Movement, are we likely to have continuation of the directional move or the start of development?
3. What is the significance of a ‘Neutral Day closing in the lower quadrant’? (See Mind Over Markets by Jim Dalton)”

Let’s take the (3) first. A Neutral Day closing in the lower quadrant implies continuation in the direction of the gap. Usually we can expect enough follow through the next day, so that by the end of the Initial Balance, the worst result would be a breakeven trade. (This is not quite what Pete Steidlmayer meant by ‘free exposure’ trade but I found it occurs often enough to be a high probability occurrence).

Let’s now turn to (1) and (2). All prices unless otherwise stated are basis March. Here’s how I saw the market:

• I could not tell from the price action if the price movement from the “E’ period was part a new IPM or part of the rotational process.
• If it was a new IPM, then continuation was highly likely since we had not achieved mean -1 standard deviation for the IPM. In addition we had the Neutral Day close to lean against. So my strategy in the first 60 minutes was to go short and monitor the break of the opening low. If the break signaled continuation, I’d stay in, otherwise I’d exit immediately.
• If it was part of the rotational process, then the high of the rotation was limited by the 50% retracement - calculated from the high of the IPM 1386 to the low at 1325.
• Consequently if I wanted to initiate new shorts, the stop loss for the new shorts was known.

In the “A” period, the market tried to rally and failed. It then went on to break to new lows. However after the break, there was no volume coming through. This signaled to me that price action at “E” Feb 6 and following was part of rotation. I had sold at 1321 as the market went to break the opening price and covered when the market began moving up, losing 2 points. At the end of the ‘B” period yesterday, we had:

• The possibility of a bullish profile. If the 50% level 1328 could hold, then we could expect a move greater than a normal day’s range (30 mean + 15). With a low at 1317, this projected a target to 1347 to 1362. You will recall from the charts of SP3 that we had resistance zones around 1356 to 1357.
• But if ‘C’ did not extend the ‘B’ range, the ‘test’ opening (See Mind Over Markets by Jim Dalton), suggested a rotational day. In that case the projected high was 1317.5 + 30 to -15 = 1347 to 1332. Again we had resistance zones between 1347.5 to 1346.5.

Figure 1 shows us the Market Profile chart as at the ‘B’ period.

FIGURE 1 Market Profile ‘B’

The market went on to form a rotational day. Figure 2 shows the situation as at end of trading on Feb 7.

Looking at the larger picture: The S&P has had an IPM starting at 1386 and ending at 1325. Rotation has formed between 1317.5 and 1347.5. The move back to yesterday completed the minimum price action required for development. But, I’m inclined to the view that we’ll see a move to the Primary Sell Zone at 1348.5 to 1344. 5 before the downtrend resumes.

FIGURE 2 Market Profile Feb 7

If we break above 1348.5, and we have acceptance above 1355.75, Market Profile suggests a move back to the start of the IPM. If this occurs, it would throw doubt on my view that we’ll retest 1286 to 1270 (basis cash) before any potential upmove.

Figure 3 shows the 30 minute picture as at end of trading Feb 7.

FIGURE 3 30-min Feb 7

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