Wednesday, June 15, 2011

6/15/2011 Initial Balance Revisited

Good evening traders,

This week I have been discussing the initial balance and how I trade it. Although today's action was dominated by the headlines in Greece, the initial balance still provided a great trading opportunity!

The market had a large gap down off the open. Almost ten points. The expectation on a day like this is for responsive buyers to be active off the open. That expectation proved to be correct and price rallied to fill 50% of the gap. Traders call that the "half gap" trade and I will discuss it in future posts, for now let's focus on the initial balance.

After the rally into the half gap, price quickly reversed and punctured the opening swing high. This was the first clue that the initial balance was likely to break lower. While price drifted higher over the next few bars, cumulative delta showed that traders were not committed to the long side. A perfect short setup. This trade was a little trickier than normal because the initial balance was wider than my previous examples. In this case 7 points. That still puts it well within the average range of 4-11 points I highlighted in my previous study.

When the market is in a headline driven mode, you can expect more volatility. As the Greece news hit the wire just before 11, ES took a dive. The sell off lasted until quarter after 3, finally coming to a rest near a previous composite low volume node. Generally the summer trading is slow, boring, grinding price action. With all the great headlines and debt crises around the world its going to be a fun season!

Check back again soon. I will be providing more examples of this week's trade. The initial balance. Good luck, and good trading. As always thanks for reading!


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