“Market Profile” was designed to visually display one thing, one REALITY: The Auction Market Process. You cannot understand the incredible amount of information to be discerned from the MP graph without understanding the Auction Process.
Auction Markets have one purpose – to facilitate trade in as an efficient manner as possible. This purpose is fulfilled by the market participants themselves as they determine where “efficiency” lies in terms of a price area that enables both buyers and sellers to find a general agreement of what constitutes VALUE at the time and point of transaction. Forget all exogenous views of what could, should, would be VALUE in a given market; the true test of VALUE is always that price that the buyer and seller agree upon at the point of transaction. Only the buyer and seller can know their respective motivation for the trade, and there are many things that can enter into that motivation. Regardless, there is a development process that is ALWAYS followed and this process leaves patterns on the MP graph (as well as bar charts, but that’s a discussion for another time).
I am getting more and more frequent questions from friends about how much longer the stock market can go up, and if we are close to a top of significance. My answer, without hesitation, is always that I don’t have a clue, because I don’t. That is actually incredible powerful knowledge to have and not many market experts will concede, “I don’t know”. Most “market experts”, especially the ones on television financial news channels, give constant predictions about why the stock market is going to continue higher forever, or crash because of X, Y and/or Z.
From a trader’s perspective it doesn’t matter. The most important concern for a trader is to never be wrong, for long. Simple, but simple only if you have a way to know how to determine when you’re wrong.
The Auction Process can help us with the probabilities of market movement. Markets seek out efficiency. Efficient markets are those that establish a well-defined range in which trade occurs. This range always has three distinct areas – an upper and lower extreme and a relative small area that is usually located near the mathematical mode of the structure. I refer to this as the High Volume Node. Efficient markets always develop this way and in doing so leave a very consistent visual footprint that looks like this:
CLICK ON CHARTS TO ENLARGE
Since markets always seek out, and always find, efficiency. Just as you can “see” efficiency, you can also see inefficiency. Inefficiency looks like this:
What’s next? You should be able to tell me.
We can’t know for sure what happens next, but we can determine some reasonable probabilities based on what we know about Auction Markets:
- There is an extremely low probability of the ES (and other indices) continuing higher at the present rate of change.
- It is almost as unlikely that a major top is forming and the markets just suddenly crash from an inverted V top.
- The highest probability forecast for the indices is that they become more two-sided.
So, we’re back to expecting this:
This WILL occur, and it will begin on the smaller time frame, first.
From just simple observation of the four primary trading indices it is clear the month of January has seen quite a ramp higher, and there are a few more days left in the month. The stock market(s) will not go up much longer at this rate of change.
Here is the Market Profile view, which gives a more complete view of the development in the same time frame:
The range of the January Auctions is likely very close to complete and it is likely that the February range will be considerably less.
This report will be our template for the stock indices for at least the next few weeks.
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