If you’re new to using a cumulative delta study, or you’re wondering how you might use the new indicators in the Acme Volume Balance & Breakdown Pack, have I got a post for you. If you’re not sure what I am talking about, click on the link, have a read-through, then come on back. I’ll be right here.
Back already? Let’s get to it.
So I thought it might be helpful to show you a few of my favorite Acme Volume Breakdown (AVB) “patterns.” But first, a couple pieces of background regarding how I use the AVB:
- I use AVB to assess real-time order flow. Sometimes I use it to get a feel for open interest over time frames longer than intraday, but I have yet to seriously study any correlations or non-correlations between cumulative delta-based open interest and future price action.
- I really don’t pay much attention to the zero line. On an intraday basis, I am not sure it means much. FACT: buyers or sellers can and do step into the market at any time, completely unannounced.
- I mostly pay attention to the AVB at inflection points – my important price levels for the day. If you are familiar with FuturesTrader71‘s vocabulary, he refers to important price levels as “areas to do business.”
- AVB confirmation patterns are most useful on rotational or balanced days where there are edges to be played – or days when there is real disagreement over fair price.
Said another way, I use AVB for entry confirmation, not opportunity identification. When I trade the ES, I trade price levels. When the tape approaches areas of interest, and it’s the right kind of day for using the volume breakdown, I look for price action and volume action to disagree. You could fairly call this “divergence.” But often it is more subtle than that word implies. Subtle though they may be, these confirmation patterns present themselves day after day if you know what to look for. Want examples?
The Double Tap Sucker Punch
The ES is famous (infamous?) for twice-testing important intraday levels. It’s basically a subtle kind of head fake, with the aim of drawing in soon to be wrong-footed buyers or sellers. What levels are we talking about here? Well, it can occur at any level, but I see it all the time around the IB high or low, the opening swing high or low, the range midpoint, the ETH low or high, etc. In my view, the Double Tap Sucker Punch (or DTSP™ for short) is one of the most frequent and reliable behaviors of the ES. When I see a double-tap at one of the usual levels, I pay close attention to the conversation that price and volume are having. Is that a note of discord I hear?
In this first example, on 7/21/2011, just before 9am PDT the ES double-tapped what would become the midpoint of the day. As price rotated down from the IB high, it stopped right at a previous swing high, bounced a little then slowly drifted back to the bounce point, looking weak, wounded and about to spring a jugular gusher. But keen observers could see this was most likely an act. The circled and underlined areas revealed a clue as to what was likely to happen next:
At the first price tap, aggressive buying volume goosed the tape, then let off for a few minutes to lure in some late shorts and gauge selling interest. After a few feeble candles of selling, still appearing weak and vulnerable, the buyers began twisting the throttle as soon as the mid-price was tagged again. Between the taps, buyers passively soaked up nearly all the selling, wouldn’t allow the delta back down to the previous tap’s level and in the process revealed an imbalance of intent.
Keep in mind that the ES is practiced in the art of deception, and frequently presents variations on the sucker punch: the triple-tap sucker punch; and the occasional quad-tap sucker punch (aka mountain top pattern). Here’s quad-tap example from 7/28/2011:
Some days you’ll see them all, from 7/26/2011:
Hopefully this was helpful for showing you how you might integrate the Acme Volume Breakdown indicator (or any other cumulative volume study) to into your trading.
Until part two… trade ’em well.