The SPY was showing signs of weakness on Wednesday even as the daily candle was forming a large 2u candle. Market profile helps expose the internal structure of the daily candle and allow for a look ‘under the hood’. The emotional buying on Wednesday led me to tweet this observation.
Below is the actual chart from that tweet. To be clear, there is nothing on the market profile chart to indicate how big the drop was going to be. I identify targets by looking at the important price levels above and below the current price and by watching the candle setups. However, this market profile chart was exhibiting poor structure as price was approaching major resistance at last week’s Half-Back (HB). The market profile weakness wasn’t a short trade trigger but it was a huge red flag for holding a long position!
So the market profile sounded the warning and the next day triggered the bearish trade. The first 30 minute candle of the day was 2d which technically triggered the 2u-2d reversal setup but since it was a green candle I didn’t take the short at that time. I waited until the next 30 minute candle took out the low of the green 2d candle. By then I could see that the high of the green 2d candle was rejected at the 8 SMA upper band which was flattening (that’s important) and price had dropped below the prior week’s HB after breaking above it the previous afternoon. That made it a failed breakout above prior week’s HB and you should know how failed moves often lead to strong moves in the opposite direction. The ensuing drop was very strong with a series of 2d candles and only a single 1. It was easy to ride a short position down for a very profitable trade!
This is really important price action analysis and you should see how great of a setup this was! Study it so you’ll recognize it on a future chart when it happens. Tweet me if you have a question or comment.