Too many traders obsess on trying to figure out the next high or low in the timeframe they trade. This creates a focus on something no one has ever been able to do and even worse, it diverts attention from what is most important to the business of making money in the market. Auction Market Analysis is unique in that it can consistently identify price levels that are inflection points of market behavior; they are levels from where there is a much greater than random chance of a sharp move in one direction of another. About seven years ago I coined the term and began referring to these levels as “Key Reference Areas”, which has since been adopted by many Market Profile traders. Key Reference Areas (KRAs) are formed through the same process in all degrees of trend all the time. The auction process is both remarkably robust and consistent.
Wednesday’s trade in the ES and other primary US stock index futures contracts (TF, YM and ENQ) provided a textbook example of how KRAs consistently prove to be critical inflection points. The May 18 lows were dramatic and the retracements off those lows that began in Globex trading Sunday night was just as dramatic. The strong rejection of those lows by the rally that followed defined that area as an important KRA. The sharp decline on the May 23 tested the area of the lows and the YM made a lower low. At “the hard right edge” the indices were at an inflection point; the indices were absolutely going to crater, of the divergence between the YM and the other indices was signaling a potential successful test and the indices would scream higher. The latter occurred. It was unnecessary to have to guess which would occur; the intraday migration of VALUE higher gave an objective signal you wanted to be long, looking for longs or flat and you certainly did not want to be fighting the market by trying to fade it. You did not have to be the first person in the pool to catch a great trade; the market provides objective information if you learn to consistently view the market through the lens of the auction process and learn how to effectively use the Market Profile graph.
The recent lows in the US stock indices are now a critical intermediate term KRA. They remain important inflection points.