Today's Trade In Context

Excellent trades don't just consistently happen out of thin air - they require market understanding.  And a large component of market understanding is knowing 1) who is dominating the auction and 2) what the current inventory conditions are.

Today, it was clear that the day and short-term timeframe were (once again) in charge, and that inventory conditions were those best described as short covering.  The short-term timeframe was revealed through 1) tempo, 2) lower volume, and 3) how the market acted around the known day-timeframe references.

Inventory conditions were made clear based off of previous context (see below) and the fact that the market was going higher, but in a slow, deliberate grind.  It did not appear that new longs were entering the market - tempo would have picked up along with volume, and the half hour bars would definitely be much more elongated.  This was just a good old fashioned short squeeze - ironically, right after Carl Icahn announces his record short position, too.  Paying attention to market generated information once again shows where the risk and opportunity is - not headlines.

Context:

The previous session really set the stage for the day.  After several days of overlap (shaded), the market made an excess low on May 6 after a failed attempt to the downside via a downgap open.  Rallying up, the market established two distributions and closed strong, near the high.

Looking at the profiles, observe the three most important takeaways from the session that followed the failed attempt to the downside - 1) higher prices were accepted as the market balanced, 2) the low is strong/secure, and 3) the high is poor, a type of unsecured high.  While a sideways, balanced profile suggests the market is waiting for more information before moving directionally, the structure at the high and the low suggest that the move will be upwards.

Coming into the day:

Opening at a 3-point upgap, the market spends very little time underneath the opening print, only extending the range by about a point.  Pushing up, A period closes strong near its high.  B period makes a poor high, pulls back to the current 1/2 back level (a weak day-timeframe reference), and then returns to the highs, where C period picks up.  Taking out the overnight high, it quickly trades into a previously established upper distribution from May 2.  D period pulls back to the overnight high level (a weak day-timeframe reference).

From this point on the market continues to one-timeframe higher, exhibiting that slow grind that is so typical of a short-covering market state.  During one-timeframing it is not unusual for the market to stop during one period for developing inventory to come back into balance before continuing.  Knowing this, I patiently waited until for my opportunity to get long with a reference to put my stop beneath.

The opportunity was revealed to me after H period stopped one-timeframing by taking out the previous G period low.  With I period opening off the H lows, I had the chance to be filled on a buy at 2073, with my stop 2-3 ticks underneath the H period lows, since my thesis was that stopping one-timeframing was only going to occur once during this session.  And the market was even kind enough to provide an additional reason to get long: a piss-poor high encompassing F, G, and H periods that was begging to be revisited.

Risk Management:

One nice characteristic about one-timeframing days is they provide continual affirmations and references for managing the trade.  I'm a firm believer in removing risk from a trade when the time is opportune to do so.  In a one-timeframing environment, you can intelligently trail your stop in accordance with successive half-hour bar lows.  The marked-up chart above is how I moved my stop from -6 ticks to +1 tick over the I, J, and finally K periods of trade:

1. When I entered the trade, I had it at 2071.25 - a reasonable point of failure for my position's thesis.
2. Once I period closed and J opened, I was able to use the I period low as my new reference for the ceasing of one-timeframing (the event which would invalidate my trade's thesis), and thus move my stop up to a few ticks under that, reducing the risk on the position.  
3. Finally, when K period's opened (finalizing the J period low) I had sufficient room to move my stop up to +1 tick, removing risk from the trade entirely.  At this point I left my stop alone - I'm not one for micromanaging things once risk is out of the trade, as I tend to make stupid, emotion-based decisions.

Profit Target:

Once a market re-enters a range or distribution, the natural destination becomes the opposite end of said range/dist.  With clear acceptance in the 5/2 upper dist, the high at 2077.50 became the visual target.  However, a nuance I observed was that the high was weak, and there was a good chance the market would not only trade to it, but through it as well.

Not wanting to push my luck, I set my exit for a few ticks above the 5/2 weak high reference, which you can clearly see ended up as a profitable trade with the market going through my exit order, filling it and completing the trade.