In the first part of this ongoing series, we will look at some example trades that use auction market theory and order flow on ES and CL.
Example 1 (ES)
In the first example the market was consolidating above the prior day’s value area. When we consolidate high like this in the overnight session without breaking back down into prior value during RTH then we can usually expect a bullish reaction.
Lots of shorts will get uncomfortable holding when the market keeps failing to break back down and they will start to cover shorts. Sellers become buyers when they don’t get what they want.
We were also seeing lots of buying imbalances on the footprint which tells us who is in control on the micro level.
Example 2 (ES)
In the next example we can see that after the open the market swept the highs of multiple prior footprint bars before rejecting back down to seek liquidity lower. Then we can see the market creating a micro balance area below 52.
This is a nice clean spot here. Sometimes the market gives us these nice volume nodes at the low of day. When we break above 52 on high volume then we can expect the market to usuallly begin seeking liquidity higher at key areas such as the POC, VAH, or HOD (high of day).
In this case the market did end up breaking back above 52 and it tested right above the VAH at 71.75 before trading back down past the lows again before the close.
Example 3 (CL)
In the last example we see crude oil holding above VWAP as we go into RTH session. After holding above VWAP after the London open the market bounced every time that it tested below VWAP.
One of the main rules of auction theory states that when we are in balance and price leaves the value area then we expect buyers/sellers to step in and start respsonsively buying/selling which causes price to trade back inside value.
It will then usually trade back to either the POC or to the other side of value and sometimes it will break out of value. Sometimes responsive buying/selling starts near the edges of value without leaving value.
Later in RTH when the market started chopping in a range, the market attempted to break below VWAP and moved down near the value area low. The market swiftly rejected these lower prices and bounced back to the other side of value again.
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