Crude Oil Volume Profile Observations

As mentioned last week on Twitter, I thought to provide some observations with TPO and volume profiles. We will take a look on the WTI Crude oil market as it seems most traders are in love with this lovely beast. However, you can use this process on any other market as well.

Last week we discussed the importance to assign a filter process in order to better understand what the larger picture is showing. With going through the periodicity hierarchy of Yearly, Monthly, Weekly timeframes we can understand the higher time frame (HTF) and figure out the path of least resistance. That said, you can use this filter process on TPO/Volume profile charts to find some nice additional levels in the overall macro structure that are confluent with your intra-day trading levels.

When looking at a Volume Profile, we are looking for areas of acceptance and rejection. In acceptance areas market participants are in agreement on price while in rejection areas, one side of the market participants are not interested on a particular price and quickly reject these levels. Actually, you could call acceptance areas balance while rejection areas would be the extremes of that balance. Well, why identifying thes areas on a higher time frame now? The answer is quite simple: An intra-day level has less significance than a weekly level or a monthly level because the large market won't recognize the day trader’s shitty little whatsoever level when the market rejects the monthly profile's low volume area. This is the reason of the importance to figure out the path of least resistance on a macro scale.

Let's try to visualize this now. Looking at the monthly profiles, we can observe that the market opened inside of the previous month's balanced range and value. The conclusion would be a rotational behavior for this month and to trade the balance extremes of this profile. However, the previous month's high got taken out and we broke out of that balance to trend higher. Here a screenshot with the mentioned acceptance/rejection areas:

As you can see the rejection areas served as nice support/resistance levels. I also drew the distribution curves into this profile to highlight the acceptance areas (black).

Looking at the current month, we can see a current weak high and low. Also to mention is the weak high back from January. Poor/Weak/Unsecured highs and lows are potential areas to revisit.

Before we getting biased, let's take a look at the weekly profiles. The previous week rejected the previous highs and was quite rotational with a close inside of the time value and above the volume value. Based where we closed I plotted some potential scenarios into this chart for the next week. To mention is the current unsecured low as a potential area to revisit.

Moving forward to the daily profiles, we can cleary see our favorite 'P' shaped profile. A P shaped profile as we know suggests short covering. It seems the market grabbed some liquidity above the highs. With that said, I am quite bearish for the next day. The open and the reaction around value/POC will have a significant effect on how I handle the market. Based where the market closed I would look to short the VPOC with a target around the next liquidity area. A break above could lead us to higher prices obviously.

However, these are my own current views and could change with the time moving forward. Please do you own research because I posted this analysis process just for educational purposes only. Moreover it's only one brick of my whole analysis process. I would share some more details but the time is precious. I thinking about to create a video or do a livestream for the next time as it takes a huge amount of my time to write posts.

If you want to learn more about Market Profile take a look at the books from Jim Dalton. Recommendable is Doug Tucker’s Market Profile Primer and the original CBOT Market Profile handbook if you like free stuff. If you are a member of The Private Banker you can read educational articles about the Market Profile and the Volume Profile as well.

Let's do our best next week and as said I will try to create a video next time. Anyway, hopefully this article is of some help for you.

Open Interest And COT Report

Every Firday we should consider a look into the CFTC Commitments of Traders report out of affirmation purposes. Here is a short description about the COT report:

The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Important to point out are the release dates of this reports as well:

The Commitments of Traders reports are released at 3:30 p.m. Eastern time. The Futures Only reports and Futures and Options Combined reports are usually released on Friday. The release usually includes data from the previous Tuesday. Federal holidays may delay release by one or two days.

With that, we know the reports provide informations of each Tuesday's (weekly) open interest and usually relased on a Friday. But what is open interest?

Open Interest

For the sake of simplicity 'open interest' could also be referred as a trader's open position that are not closed or delivered on a particular day. Here the defination from CFTC:

Open interest is the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc. The aggregate of all long open interest is equal to the aggregate of all short open interest.

Example:
Day 1: Trader S buys 1 contract and R sells 1 contract = 1 Open Interest
Day 2: Trader Y buys 3 contracts and X sells 3 contracts = 4 Open Interest
Day 3: Trader X buys 1 contract and S sells 1 contract = 3 Open Interest

Note: X closed one short position of his 3 shorts and S closed his long position, while Y still holds three open long positions and R one short position. So, we have three open longs and three open shorts in the market makes a open interest of 3 as the total of all long open interest is equal to the total of all short open interest.

What is volume then?

Volume is the number of business done in a particular market during a given period of time. It is the measure of activity between sellers and buyers. So, from the previous example the volume during the days are:

Day 1: 1 volume
Day 2: 3 volume
Day 3: 1 volume
Three days volume: 5

COT Reports

Back to the subject COT Report and looking on the CFTC website's list, we can see several reports for the various market sectors splitted in a Long or Short Format as well as Futures only and Futures and Options Combined makeup:

Let's assume we would like to analyze the report for the WTI Crude oil market (Petroleum and Products). Firstly we consider to keep an eye on the Futures and Options Combined Long Format report. Secondly we combine the NYMEX and ICE data. Why? Why should we leave out all the beautiful data and looking only at some Futures data?

Here is a screenshot form the COT report for WTI Crude oil with the week ended January 27, 2015. Tip: You can use CTRL+F to find the Crude Oil section rather than scrolling around.

Put the two together, we can see a open interest of 3,298,086. You should keep the closest attention to the 'Managed Money' section as this represents professional related guys such as hedge funds. Now with looking at this, we can observe an increase by 13,067 long positions and an increase by 10,025 short ppositions (NYMEX + ICE). This makes a managed money net buying of 3,042 long contracts in the week ended January 27, 2015. Additionally we can see that the managed money is positioned more to the long side with a ratio of 3:1.

It will be interesting to see the number of closed short positions in the next report that will be released on this Friday. Because of all the short covering and stop runs the number should be huge. We'll see.

Anyway, stay open minded and happy as success is a habit!