Market Profile: Special Report on the US Stock Market

Special Report: US Stock Market(s)

 

In 1985, my professional career as a stockbroker began with Kidder, Peabody. It was at the beginning of the end of a time when brokers were still trusted advisers as opposed to used car salesmen, and actually received a fair amount of legitimate training about the US capital markets and how they worked.

In the summer of 1986, I spent three weeks training at Kidder’s headquarters in New York, a few blocks from Wall Street. Founded in 1865, Kidder had been around forever, and we had exposure to a number of “old-timers”. One afternoon, a fellow trainee and I visited one such individual in his office. He was an octogenarian who still ran marathons and he was extraordinarily bright. It was a fascinating visit as he had been a broker in the 1920’s; he lived and worked through the 1929 crash and every subsequent bull/bear market since. He also scared us to death.

Having recently reached yet another all-time high of 250, the S&P was trading at nosebleed levels. He warned us there was no rational reason for the market to be so high and that some sort of financial debacle was inevitable. He felt that a 1929-like crash was a real possibility.

He was right. The market did crash. The problem was that he was off by over a year and the S&P rose another 35%, topping near 337 in August of 1987.

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The 1987 market crash had a profound effect on me personally and professionally. The most profound effect it had on me professionally was that I learned a brutally administered lesson: I did not even know what I did not know about markets or about trading. A complete story for another time, but I was short the market into and through the crash – and lost money.

Maybe the most important take-away from that experience was an immediate skepticism regarding market experts. This included the high-brow Kidder analysts as well as the market gurus of the day. This skepticism has grown through the years as a result of riding all the bull and bear trends in the stock market and watching and listening to all the “experts” and “gurus.”

Shortly following every new market high following a bear trend in the stock market, regardless of the depth and duration of that bear trend, experts and gurus begin calling the next market top. They are always right. Sort of.

Is there a thing of which it is said,
“See, this is new”?
It has been already
in the ages before us.


There is no remembrance of former things,
nor will there be any remembrance
of later things yet to be among those who come after.

Ecclesiastes  1:10-11

 

My solution was to become my own expert. Long before I became a trading educator, I was a trader. Please believe me that I share and probably exceed whatever trials and tribulations you have been through in your journey as a trader. No matter where I looked, who I studied, what software I used, time frame I traded or guru I followed, I still lost money and it remained clear that I did not know what I was doing. However, this represented tremendous progress! At least I now knew what I didn’t know.

Shortly after the 1987 crash I was still trading (some people never learn, amIright?) and another complete story for another time, I “discovered” Market Profile and the work of Peter Steidlmayer. I didn’t understand it, but I immediately knew it was different and might, just might be something valid. So, for the past 30 years I have traded and studied first “Market Profile,” and then made the natural progression towards studying the Auction Process. It worked then. It works now. There are a lot of supposed constants in the market. 99% of them are constantly wrong.

Which brings me to the present. The stock market is deep into a bull run following the 2007-2009 bear market. It feels like there is a top close by time and price wise. Experts are warning of everything from significant corrections to another complete financial meltdown. I’ve learned I can’t trade “feel,” and I damn sure don’t trust “experts.” What I will do is watch for objective signs the stock market is forming a top. I will base my actions on reading the Auction Process. I cannot find a single stock market top for which I have data, and I have data going back to the early 1900’s, when following the unfolding Auction Process would at a minimum have kept one out of the most severe part of any bear trend. The Auction Process would also have allowed for the opportunity to actually make money trading it.

Below are quarterly Auction (profile) views of each of the primary trading indices.

Each letter in the profile unit represents one week of trading. For those of you who do not trade futures, the ES is the e-mini futures equivalent of the S&P 500, the YM is the e-mini futures equivalent of the Dow Industrials, the NQ is the e-mini futures equivalent of the Nasdaq 100 and the TF is the e-mini futures equivalent of the Russell 2000.

Note that all four are trading above their quarterly Auction lows and all four are trading at or above their respective HVNs (High Volume Nodes – the area of the greatest consensus of VALUE). The HVN is represented by the dotted vertical magenta line. There is nothing from this view suggesting a top is imminent. Based on this time frame, the initial signal of a potentially significant top might be in place is if all four trade below their respective HVNs.

Below is the weekly bar chart view of the above time frame.

Below are the monthly Auctions.

All four indices are trading above their respective monthly lows. Based on this time frame, if all four were to begin trading below those lows it would be a signal of a potentially important top.

Below is the daily bar chart view of the above time frame.

I could continue down in time frame following the process as above but for anything but an extremely short-term perspective, the first sign the dominos are falling is if the levels highlighted above are exceeded to the downside.

Simple, huh? Well, not really, and as a trader I understand that. But at least the above provides something that can be consistently replicated, that is valid and upon which a RULES BASED Trade Plan can be effectively developed!

You can be your own expert. Try.

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