Dalton Market Commentary On Structure

16772 W Bell Road
Ste 110-452
Surprise, AZ 85374
S&P 500 Recap and Preparatiion Report For 1

1-5-2016
Mondays big opportunity is outlined belo
below. This was easily
asily recognizable using marketmarket
generated information. Additionally,
dditionally, it provides a good example of when you use
options.
16772 W Bell Road

Ste 110-452
Surprise, AZ 85374
Perspective The S&P Recap and Preparation Report for Monday introduced a potential
weekly scenario. This scenario showed poor structure both above and below Fridays
settle, which introduced the possibility of a volatility-driven week as opposed to a
directional market. That potential is still alive based upon Mondays settle.
Following a weak economic report on Sunday evening the Shanghai Index was down
almost 7% before the market was closed; a global selloff followed.
US markets gapped sharply lower. Markets appeared short across the globe.
When markets gap higher or lower, there are usually two courses to choose from:
1. The market continues directionally with the gap, or
2. The market trades in a rotational manner as it seeks a level where two-sided
trade can take place. Mondays market was rotational from the opening bell.
This is an important observation.
My initial purpose is to let you see how Mondays big opportunity was developing all day
long. Additionally, I want to show you how options could have been used to benefit from
Monday afternoons set up. There was no pinpoint accuracy on on exactly where to buy
options from this set up, however, there were some very important pinpoint references.
Before we go forward I want to share what was inside my head:
1. As discussed earlier I thought a rotational environment was likely as the
structure above and below the market was weak.
2. I knew that the odds of the market being short both from last Thursday and
Friday and from overnight trade was high.
3. If you will go back and listen to the recording of Monday mornings webinar
you will hear me comment:
a. That the structure above the market was as poor as the structure
below the market, specifically the Profile from December 22. It was a
trend day with accompanying poor structure that included several
anomalies.
The structure of the December 22 Profile along with poor structure from December 21
was highlighted in one of the charts from the Recap and Prep Report for January 4
(page 3):
16772 W Bell Road

Ste 110-452
Surprise, AZ 85374
b. Early during Mondays session, the market rallied from exactly the
overnight low
low. I made two comments at that time:
i. This is a weak low as the A period low (first 30 minute
m
period)
stopped exactly at a mechanical reference
reference, the ov
vernight low.
The
he odds were hig
high that that low would not last. Additionally,
A
ii. I said that if there were long
long-term
term selling in the market it is
unlikely that the market wouldve stopped exact
exactly
ly at the
overnight low the first time down.
c. Following a rally
rally, the market died just
st a few ticks from the opening
price. I mentiioned that this was another weak reference as it stopped
so close to the mechanical opening price.. This was an important day
timeframe referenc
reference for two reasons:
i. When we reentered the overnight range I saw this is
i as an
opportunity to go long
long. Once
nce you are long you have to know
how to monitor for continuation. Failure to trade to and through
the opening price brought the short-term
term sellers to life. The
short--term
term sellers aggressively forced the market lower. It was
mentio
oned in the webinar that failure to trade thro
ough and find
accep
ptance above the opening price was an exit for longs.
ii. At the same time that the short
short-term
term sellers used this
opportunity to short the market
market, I still saw the opening as a
questionable lasting reference
reference. This
his is a very big point. I made a
note of this ob
observation
servation so I would not forget it as the auctions
continued lower.
16772 W Bell Road

Ste 110-452
Surprise, AZ 85374
Please refer back to the first capture taken at 3:29 pm ET on page 1. The market sold
off from exactly one tick below halfback. Once again, this was a weak rally high as it
was exactly at a reference. Additionally, halfback is typically a day timeframe reference.
It appeared to me that laggard short-term sellers were getting short very late in the day
against a market that was already very short. Combine this thought with the earlier
comments I have shared with you.
Options As the market began breaking from halfback towards the L period low at
1983.25 I began to accumulate the 2020 calls that expire this Friday. Prices ranged
from $7 to $9.25. No evaluation models were used in the selection of these calls. The
purchases were based upon my assessment that the market was very short.
Next refer to the 3:37 pm ET capture. Notice that the M period high was a single tick
above halfback. Once again traders began to sell from that level. At this point I added to
my call position as I saw the market getting even shorter. The 2020 calls settled at 14.
It has taken me some time to get to this level of market understanding. We will do our
best to share my thinking with you as we go through the Intensives. I could have never
reached this level of understanding by looking at ladders and bid ask spreads. Ask
yourself if you really want to stay with bid ask and one and five minute charts.
During the Intensives we will use the chat function to attempt to guide you through
another way to observe markets. We dont always get it right and we also suffer from
cognitive dissonance from time to time; however, we will do our best to mentor you.
Lets prepare for Tuesday.
16772 W Bell Road

Ste 110-452
Surprise, AZ 85374
For several weeks we have remained within a low confidence tradin

trading
g environment.
environment
During
uring this time, I have found that my best opportunities have been dynamic. Dynamic
means that the opportunities have developed within day timeframe structure.
structure The
example discussed above was clearly a dynamic opportunity.
Spikes Spikes occur
ur late in the day
day. There
here was not enough time remaining to determine
if the prices comprising the spike would be accepted or rejected. Spike rules are
applicable for Tuesday morning
morning. They are as follows:
1. Continuing above the spike is positive as it demonst
demonstrates
rates that prices had not
gone high enough to cut off the buying.
2. Finding acceptance within the spike is also positive as it tells us that the price
exploration was for real.
3. The base of the spike is support
support. Trading
ading back down below the base of the
spike is negative as the price exploration was rejected.
There is also an almost 20 handle gap remaining above Mondays settle
settle.. It is unusual to
gap
ap through a gap or into a ga
gap, however, in this recent low confidence trading
environment this has occurred on sever
several occasions.
We will update you in the morning prior to the opening.

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16772 W Bell Road

S&P 500 Recap and Preparatiion Report For 1

16772 W Bell Road

16772 W Bell Road

16772 W Bell Road

16772 W Bell Road

For several weeks we have remained within a low confidence tradin

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