There is so much that is atypical about this market … what’s driving it … what the market’s perceptions are and how those perceptions are weighted … truly a high velocity 3-dimensional chess game.
There is so much atypical … that anyone confidently predicting anything about how this auction market process will develop is misleading themselves, you, or both. Historical references … a common tool for forecasting … is an almost absurd application in today’s environment. Business cycle: are we in late cycle or early cycle. Positioning is different, based on those theses. Inflation or stagflation? Good arguments for both. Again, positioning is different, based on those theses.
At most … at most, we *might* identify price levels where increased vigilance is warranted … where the market might be especially fragile … where small changes in information pose the risk of large changes in the auction. But, here again, how many times, this year, have we identified key levels and analyzed prevailing sentiment … only to watch the auction blow through those “high liquidity limit orders” and get overrun by large market orders … making those “key levels” appear a mirage?
Spend a lot of time analyzing structure and sentiment? Unhealthy. In a market where news-reading algorithms almost instantaneously shift price dynamics … in a market so heavily laden with huge allocations to index options … and which now trade overnight … turning on a dime, algorithmically.
So what’s a trader to do?
First, detach from any devotion to forecasting. Ain’t gonna work. Second, understand well the auction market process; for this market is no different, in that regard. Same-o, same-o. And auction market theory is fundamentally not predictive … has proven there is no serial correlation in daily price moves … and is limited to … really … only one strategy (in-trend breaks out of balance areas).
Third, there will always be great value in understanding what factors dominate and contribute to intermediate-term trends … those factors that cause momentum. Need momentum to make money. Over the intermediate and long horizons, those forces count.
Fourth … if we truly have no ability to predict … zero … then we can only strive to trade in-trend … and effectively clip drawdowns (known as managing risk).
While the auction market process is a priori, I’m working on a trend indicator (shown above)… an adjunctive tool for today’s wild and crazy price dynamics. At this writing, it needs additional work … just not ready for prime time. When it is, I’ll figure something out in terms of sharing. That gets really complicated and time consuming … so don’t hold your breath. Quant camp?
But in the meantime, I would strongly urge detaching from any loyalty to forecasting … whatever historical norm or indicator you’ve used … and sharpen your understanding of the auction market process.