**August 22, 2022** #writing #auction-theory The weather here has been perfect over the past week or so and I've been taking full advantage of it and getting out on my bike. Cornering is a skill I continue to develop and one of the things I learned years ago was too always look ahead to where you want to go and trust your machine to get you there. This seems pretty obvious but it's hard to do in practice because your instinct is to look at the potholes and other obstacles in the road directly in front of you instead of the road ahead. As I was narrowly avoiding a car on a blind turn last week I got to thinking about the current debate in the market as to whether this rally we have seen is just a bear market rally or if the bottom is in and new highs are ahead. It made me think that while we are asking "is this what it is" we may not be asking the right question and missing out on what is actually taking place right now, kind of like looking at the potholes instead of the road ahead. That reminded me of this [article](https://fs.blog/evaluating-information/) over at The Knowledge Project about Nobel Laureate Richard Feynman's seven reasoning tricks. The fourth trick tells us to focus not on what is possible but instead what is probable, based on what is happening now. With that in mind we are going to investigate what we have seen in the S&P 500 recently to understand what has happened which tends to have a lot to do with what is probable in the near future. Below is an annotated daily bar chart of the ES Mini futures contract going back to April. ![[Pasted image 20220822092440.png]] We have market four points on this chart that we are going to inspect more closely using the Market Profile which is like a microscope to help us see the detail of what is going on within the daily bars. But before we do that let's set the stage by looking back to the highs in April that came from the light blue line which represents the 100d SMA. At that time the 100d and 200d were very close to each other and the selling we saw in April was coming from these widely followed references. This is an indication that the selling was mostly coming from short-term and systematic money that focuses on technical references like SMAs. Once the market had broken it was pile on time and in late April and early May we saw two matching highs around the 4300 level, another sign of shorter-term sellers using round numbers like the 4300 level to enter new shorts. The final leg down came in early-June with back-to-back gaps lower that took the market down nearly 400pts(~10%) in three trading sessions. That was followed shortly thereafter by the widely debated YTD low that we currently have. The reason for setting the table like this is to remember the feel of the market in June, it was pure panic, the market had been down all year, inflation was raging, the dollar was raging, the Fed was going to raise rates to the moon, gasoline prices were nearing $6 nationwide, it was not good. It was also easy to be short stocks and at this point the bulls were in hiding and the bears were in control. Who were the bears and how strong were their positions is the important question to ask, and while we can never know for sure, we can get some clues as to who is doing what by observing the nature of the selling in terms of locations of highs and lows, numbers of gaps, elongation of the market, etc. The break we saw in early June was not indicative of larger investors liquidating their longs. Times like that look like the panic lows we saw in March 2020 and March 2009. This time looks more like momentum and systematic traders piling on the short side of the market. It is not in the interest of larger investors to murder a market like the market was murdered in June. The June breakdown looks more like laggard shorts piling on with prices down all year long. So that brings us to the mid-June lows. When you get a high or low that has good odds of being lasting you want to see a firm rejection of prices. By looking at the Market Profiles of the June low we get a more detailed view of what was going on then and if we did in fact see a swift rejection of those lower prices. The picture below shows June 16, 17, and early trading on the 20th. ![[Pasted image 20220821202605.png]] The first thing that jumps out is the three matching highs. The high on the 16th and 17th were exacting to the tick. This shows the sellers there were very short-term traders who thought selling at the previous day's high was a good idea. If we had seen real money capitulation, the size of the selling would not have allowed prices to drift higher that day. We also see two excess lows evidenced by the single prints with a green line next to them. Single prints are excess, they show that the prices were unfair, and buyers were there to take the market higher. However, in this case the two sets of single prints overlap showing that the buying taking place there was not strong enough to keep the market higher. This could mean that the buying we were seeing on this day was not new buying, but just short covering. Probably the short-term traders selling at the previous day's high decided covering near the previous day's low was a good idea. Now moving on to the second highlighted region when the market tested the 50d and launched the most recent rally we have seen. The thing that jumps out in this picture is how precisely technical the market moved. After the June low we saw a short covering rally that established a new trading range (the Lower Balance) and late July we broke out higher from that, but since the market had been down all year we were in "sell the rips" mode so every rally was being sold. The market had broken out on the 20th and continued higher through the 22nd and then the sellers came out, however this time when the market came down to the 50d things were different. That morning we had every reason to go lower: WMT profit warning, SHOP cutting 10% of their workforce, and the IMF cutting global growth forecasts; but the market could not take out the 50d. There was a decided change in tone as the CTA's had turned from sellers to buyers and we can see what they did to the market next. You can see on the graphic below how the market moved quickly through the thin, gap lower from June taking the market higher by about 200pts through the 100d and back into the early June 8-day balance. ![[Pasted image 20220821204756.png]] The last graphic gives us a great comparison to the first set of profiles because we can see what good excess looks like. On Tuesday last week the market was going for the 200d and initially struggled to get through it as everyone knew it was a likely profit taking point. But then all those sellers got run over as the market took it out and accelerated through it in the afternoon only to run into a wall of sellers and turn sharply lower. The market tried to get back to the highs later that day and the next but was not able to do it; the single prints held. We often point out that markets don't turn on a dime, so after failing to find acceptance above the 200d the market came into balance and then on Friday broke out lower. ![[Pasted image 20220822102641.png]] The amazing thing about the market this year is the technical accuracy of all these moves over the course of months. Those matching highs at 4300 I mentioned earlier, we got them in this last run up. Those back-to-back gaps lower were taken back very quickly. The market launched off the 50d, got the 100d, and went right to the 200d. The selling from April started at the 100d. Realizing this gives us a roadmap for what may transpire in the coming days and weeks ahead. The rally we have just experienced left a trail of extremely weak structure in its wake, including a huge 60pt gap higher. Looking at these profiles, the thinner they are the less support or resistance they offer the market as we come back through just like we saw in the rally in July that quickly moved through the June breakout lower range. We have JPOW at Jackson Hole this week and everyone seems to be scared about him being very hawkish. We could see a lot of backing and filling leading into that and really not change too much in the overall picture for this market.