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5-15-2013 – SPX makes new historic highs yesterday  -1651

So where do we go from here? How do we trade new highs? What can we expect?

We all know the market auctions back and forth to find and build value. The expectation after a big move up or down would be to see if that level can sustain the move and build value at a higher/lower level.

The first thing to look at is where is the prior days value area, how big is it and where are the levels. When in new uncharted territory or air these levels will be our immediate sandbox to play in.  When the market comes out of a stage 3 as it did yesterday we are now in a new stage 1 seeking value higher.  So our expectation would be for a narrow range day inside the prior day’s value.  1648.25 being the VAH and 1641.75 VAL give plenty of room to back fill and trade in that range.

As traders we ought to be thinking of the next move of the market. Not predicting but being ready for any one of the following scenarios:

1. Rotation inside the value area building sideways consolidation.

2. Continuation higher in a second day wide range bar up.

3. Give it all back and create a failed breakout over the prior stage 3.

The first option would be my first expectation.

The chart shows how the 26.50 level is significant from the volume profile. We auctioned in a stage 3 for about 4 days there and that created the highest acceptance of volume. As a matter of fact if you look at the globex trade Tuesday morning the European session had tested that level. So if you’re thinking that this market is cooked to the upside think again we will need to break that key level in order to start any momentum lower.

Keep your powder dry and trade the edge.