The MarketDelta Blog

For two months, the market has received much attention for its high volatility, dramatic drops, increased risks and uncertainty. We’ve brushed with “bear territory” as the news media like to often repeat, and have had significant intraday declines reminiscent of 2008.

What’s a trader to do?

Here is a very simple chart with two useful long-term indicators added to it. This is a daily chart since the August “crash” that shows two trend lines and a volume profile of all trades during the last two months.

The first notable event on this chart is the triangle pattern with lower highs and higher lows over many weeks. Most traders understand that on any timeframe, a contraction of volatility precedes a notable move in one direction or the other.

You can clearly see on this chart when the breakout of the triangle occurred, offering strong reasons to expect further declines. In fact, selling the bounce back into the triangle was a good short setup with good risk-to-reward.

Now we are at today, October 5. The market has enjoyed a good rebound yesterday and, as of 1:40pm Central, another nice rebound today. But where do we put this in context?

One of the immensely powerful and unique features of MarketDelta is the ability to create custom volume profiles over any period you wish. Using the Profile tool, we can build a distribution starting at the August breakdown to the present and clearly see where the value areas lie in today’s market environment.

We can clearly see that, at the time of this writing, the market is touching the Value Area Low of this last period of rotation over two months. In fact, in the last few minutes while writing this article, the market sold off 5 points from this level, so anyone shorting this Value Area Low would have enjoyed a decent scalping opportunity.

But when looking at the bigger picture, it is easy to see that, despite all the dire predictions among the analysts, the actual market activity is telling us something: The point of control (POC) is at 1157.25, making that a very reasonable and probable trading price, and the top of the Value Area isn’t until around 1200. To demonstrate how successfully Value Areas capture and predict market rotations, here is another graphic of the same chart, but the Profile is drawn to end at an earlier date:

By only showing what the Profile looked like at the time you might have traded it, you can see very clearly how the Value Area Low at that time effectively captured the market reversal that moved from around 1130 back up to 1200. And actually, the distribution has been so normal that the value area did not change much over the course of the following two weeks, showing just how predictable all of this volatility actually is.

These are volatile times, but you can often simplify all the uncertainty with some basic views of the greater auction taking place over many days.