‘O happy dagger, this is thy sheath’… Juliet takes the dagger, stabs herself… end scene. The classic method for dealing with bad news in a Shakespeare play — as dramatic as it gets.
Every day, the market receives news. Some days the news is bigger than others, and some days the news is far worse than others. Either way, there’s going to be drama and the market is going to react. No more so than on the first Friday of every month when the jobs report comes out.
Instead of waiting, watching, and losing, you can use micro volume levels to determine exactly what price points the market will respect — even when freaking out. This will help you plot reliable fade entries, while millions of traders reach for Romeo’s dagger.
Shakespearean market drama you can profit from
Shakespeare’s plays have been translated into every major living language in the world and are performed without let-up. Imagine that — a dramatic knife being fictitiously thrust into the heart of actresses around the globe at any given time in reaction to the sight of Romeo passed out with a vial in his hand.
Every day, markets effectively do the same thing when they hear news they don’t like. A collective hand is placed on the forehead in despair, knees buckle, and price reaches for the figurative dagger. As price oscillates with a wild look in its eye, trying to make sense of the announcement, report, or whatever — the market scrambles to respond.
This chaotic period of confusion (panic) can be the source of great opportunity, or devastating outcomes. Without fail, there are always traders caught on the wrong side — attempting to profit from a bet gone wrong.
Regardless of the news, or its impact on price, you can profit from the initial overreaction by knowing where price will finally clear its head and return to sanity.
A long-standing feud that irritates price to this day
Believe it or not, Romeo and Juliet is based on the real-life story of two lovers who died for each other in Verona, Italy in 1303. The Capulets and the Montagues existed in Verona, and Shakespeare apparently discovered the story thanks to a poem entitled “The Tragicall Historye of Romeus and Juliet”.
Like the poem that Shakespeare’s masterpiece came from, the markets also look to long-standing historical pieces when making sense of the world’s news. They come in the form of long-term Volume Rejection Levels (VRLs) and Institutional Trading Levels (ITLs).
Within these levels you’ll find at least 300 days’ worth (if not more) of market behavior and history. Specifically:
- Volume Rejection: Instances when the market has backed away from a price point with a dip in volume.
- Institutional Trading: Moments when the institutions stepped in and put their foot on the gas.
Given the sheer volume (or lack thereof) captured over the course of long periods of time, the market naturally leans on these levels when price is on the run. Especially when dealing with negative news reports, these levels can be counted on for support, resistance and reversal.
Profiting from a scorned market
Given the nature of the relationship between the Montagues and the Capulets, the fate of Romeo and Juliet seemed all but sealed from the beginning. For good measure, a nice romance with a little violence was mixed together and — boom — you have a literary classic.
The same is true with the news. There’s always the lead-up — the courtship between the market and the forecasts (rumors). This is followed by the announcement, laced with drama, surprise and betrayal. With nothing left to do but freak out, the market steps in and plays its role.
You can plot and monitor this clearly as price consolidates in the moments leading right up to the news and then explodes with fury. After about 30-45 minutes however, the extremes have set in — and the market is looking for a point it can use to return to the generally accepted value.
Take our recent jobs report and its impact on the ES. Note how the disappointed market responded to the missed projection with sellers going on the run. Finally, after all the daggers had been plunged, it rebounded. Where? Right on an ITL.
Stalking an entry at this level after 30-40 minutes had passed would have delivered a nice bundle of ticks as price returned back up.
Confirming price’s true love with value
If the news is really extreme, you have the benefit of Order Flow Sequence Tracking Intelligence to tell you if price will barrel straight through a VRL or ITL. When price is on the run (up or down) you can monitor who’s in control simply by watching the deltas, imbalances, and most importantly — the value zone.
With our ES example, note how price kept falling in the second bar, even though there was a VRL. Your clue to steer clear of an entry would have been the bold red imbalances on the left. That tells you that sellers are still in control, taking more sell positions than the buyers at those price levels by a margin of 300%.
Additionally, look to the right… you’ll see that price was still very much in the middle of the value zone (right within the red area). This means that conditions had not yet reached an oversold extreme.
Valuable information to avoid being caught in the fury of an angry, scorned market that just got dumped by a jobs report.
Profiting from drama while avoiding market daggers
As we all know, Romeo wasn’t really dead. Imagine his heartache when he found Juliet. The drama, however fake, gets relived every day in every classroom and stage — and there’s always a tearful eye in the place.
The same is true in the market — regardless of the news. Don’t fall for the fake — trade with the real reversals that await when the impact of the news finally fades. Keep an eye on imbalances that fuel candles that barrel through all price levels.
When they die off, target a macro level either with ITL or VRL below (or above) the Value Zone. When you see the long tail along with Sequential Decline and/or Responsive Activity — get ready. If you see the COT at that end of the bar — make your move.
Take the curtain call with profits in hand instead of tears and anguish.
Noft Traders offers a Funded Trader Program. To learn more, visit their informational page at NOFT-Traders.com.