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dljones@cisco-futures.com



Congestive Market Timing: The Run-Pause Profile (TM)

Background Information


Donald L. Jones
Copyright December 18, 2006

Markets are observed to run and pause on many timescales. On a multiple day time frame, the Overlay Demand Curve (Visual Graphic) locates periods of pauses or balances. In multi-day timeframes, the timescale is normally big enough that volatility is largely averaged out and market intent (value definition) is clear.

In the life of a trade there often comes a time during a day when the trader says to his/her self "It looks to me like the market may be coming into congestion, but I could sure use another opinion". Run-Pause (Congestion) is an objective source of such information. The one-day Meta-Profile/Market Profile is a case in which the trade-off between market intent and noise makes it more difficult to get a reading of just what is going on. Looking back, we often find about three clear run-pause pairs for the day. So the market regularly offers the day trader opportunity, but it is sometimes hard to see it in real time.

Intra-day market analysis requires that a great deal of attention be paid to noise and volatility. Our research does show that an intra-day congestion analysis product can be developed from basic market principles. Auction Market Value Theory. Look at the Axioms for what is permitted.

The Run-Pause Profile (TM)/Congestion Profile (TM)
Applying auction market theory rules, we have developed the Run-Pause Profile (TM)/Congestion Profile (TM). The Run-Pause Profile is designed to give the day trader a here-and-now intra-day reading of the short term market condition (intent). It can be a sensitive market timer for the day trader who understands profile concepts. For the product reported here, the method begins a day by assuming a congesting market on the time frame the customer has chosen (5, 10 or 15 minutes are the permitted selections). It then sets a congestion-range price target. If the target is exceeded within the first four time periods (time frame chosen by the user), non-congestion is assumed and the search for congestion is restarted. So 20 minutes is the minimum length of time considered to be a completed 'congestion profile' for a 5 minute time frame. (A time frame of 10 minutes takes forty minutes to complete and a time frame of 15 minutes needs 60 minutes.) The standard time frame for the Meta-Profile is 30 minutes (30 minute bars), too large for much intra-day definition, but just fine for a complete day. The Run-Pause Profile requires a different basis from the Meta-Profile, a different approach, as explained above.

In the first example below (five minute time frame), the congestion parameter was exceeded in the second timeframe (08:35). That occasioned a restart at 08:40 and so on for the first four tries (through 09:25). These continued denials of balance alerts you to a potential directionality of the market. If you are a directional, trend, type trader you know that either the market is moving or it is just volatile. You can note that the prices defining the (four) time frames, 8:30, 8:40, etc. are generally moving down.

Now, imagine that it is 09:40. You see the first four Non-Congest lines followed by a line starting at 09:30, ending with 09:40 with Congest in the Con/No-Congest column. You are to understand that a congestion is still in the test phase and will be so until the end of the fourth time frame, 09:45. That congestion lasted another five minutes through 09:55. Balances are 'continuous and migratory', meaning that a small enough price level change will not kick the market out of balance, but the balance limits may be moved. That happened between 09:55 and 10:00, when the new congestion, at a slightly higher level, began. If the price change lies outside the permitted paramaters a non-congestion report is triggered and the seek for congestion begins anew.

Use of the Run-Pause Profile
How would you use this information? It would depend on your trading strategy, would it not? If you are a breakout trader, you would likely view the start of congestion around 09:35 or 09:40 as an alert that your early directional market movement is over. Coupled with your knowledge of the balance limits (i.e. from the Visual Graphic or other device of your own making), you suspect that 1) a balance is setting in and is meaningful or 2) this is just some temporary balance activity away from the earlier imbalance movement. If 2), you adopt a wait and see attitude for return of the Non-Congest signal.

A responsive trader would need to know the balance limits just like the breakout trader. In a balance, prices tend to rotate between the upper and lower limits. So long as the balance holds, the responsive trader wants to 'sell tops' and 'buy bottoms', A move to Non-Congest (down) near the upper limit of the longer term balance would be a 'short' alert. A move to Non-Congest (up) near the bottom of the balance would be a 'long' alert. Run-Pause Profile gives you the market timing for your startegy. A somewhat longer term view would come from the 10 minute timeframe (second table below). You also have the option of the yet longer 15 minute base. In any case, you are able to monitor market changes on very small timeframes within a trading day, observing intent as it develops.

Predictions
Is there an element of prediction with this methodology? Yes, to the extent that when a market goes from congestion to non-congestion you know the direction of the move. e.g. After 13:20 on the 10 minute display you see an upward thrust in price, accounting for the Non-Congest reading period 13:20 to 13:40 (from 132670 to 132900 on the first high and similarly for the other three prices). You can pinpoint the start of a breakout (really an alert for breakout, but not how far or fast it might go). The prediction comes from the fact that congesting markets tend to continue in that state, non-congesting markets tend to continue their flow. For example, in the first (5 Min) table below, the non-congestion from periods 8:30 to 9:15 started with a high of 132500 and ended with a low of 132220 (a move of 280 in under an hour). The congestion phase, 9:30 to 13:50 started with a high of 132320 and ended with a low of 132860 (a move of 540, or about 100 points per hour). So, there was movement in the designated congestion periods (rotation within a balance), but it is relatively much less than movement in the non-congesting periods and it is bounded by the upper and lower limit of the congestion. This price change within a congesting period is an illustation of the 'continuous and migratory' nature of the market. There is some directional movement in a balance. A part of any successful trading is the ability to sift the meaningful activity from the noise. A relatively small (volatility) move in a balance should be ignored, while a larger (change in intent, such as a breakout) requires a decision.

In the example, would you have known that a move of about 300 in an hour is meaningful movement, or as we would say, non-congestion? You might. Would you have known that a move of about 100 points per hour fits within the congestion arena? Probably not. But it gives you a measure of risk at the current point in time. Markets change from time to time (day to day and even within a day) and a methodology such as the Run-Pause Profile can keep you tuned into that market--you can be there when the action starts. The methodology adjusts to current market conditions and hence you know them in detail and at a level you cannot find elsewhere.

Limitations:
There must be an adequate amount of data for valid results. The TIKS column counts ticks from TimeB (first period start) through the end of TimeE (last period). If that number gets small (just a few ticks per line) there may not be enough information to draw a valid Con/No-Con conclusion. Should there be no trading within a timeframe (5, 10 or 15 minutes), that timeframe is completely excluded from the analysis. In some markets at some times there may be long periods of no trading and hence too little information to act on. Just as with most trading, there must be enough activity for the market to form and display intent.

Note: If the market range is outside the bounds of the test parameters there will be no display line. The UC opens at 08:30, but the 10 minute base first kicked in at 08:40 and the 15 minute one, not until 09:30. It is possible for a given market to be out-of-bounds all day. This methodology works with markets that are reasonably well behaved. Obviously, if the market is not pausing, a run-pause measure is not useful. A non-pausing market is passing you information--the message that the market is directional.

To get the data, you will be asked to input the trading symbol (UC for the SP, DJ for the Dow, etc.), the delivery, the data date and the time length of the market measure (5, 10 or 15 minutes). Refresh rate is limited to once per three minutes.

 The set-up:  We use SP (it has a long history in the AE Reports, but the same applies to the emini 
                   by dividing dollar amounts by 5.

As of the close of Thursday, May 4, the Advice Engine Report shows the SP (UC for ticks) in balance:
     (SP is also in the May 4 Advice Engine Select Table, risk = $532. Traded on May 5; Potential = $2300)

 Balances
  10 day Overlay  Upper Limit = 132200   Lower Limit = 130500 
   5 day Overlay       "        132050        "        130850
   1 day Profile       "        131880        "        131590

   Strategy Short side: Price below 131590 is an alert to go short
                        Price below 130850 is a confirmation of a short directional move (breakout)
                        Price below 130500 is a second confirmation of a short directional move (breakout)

  Strategy Long side: Price above 131880 is an alert to go long
                      Price above 132050 is a confirmation of a long directional move (breakout)
                      Price above 132200 is a second confirmation of a long directional move (breakout)
                      

  Trade Day Activity: The 5 minute Run-Pause Profile table
    Price in the first 5 min of trading is above the 2nd confirmation of a long breakout: the market is directional up.
      Run-Pause shows Non-Congest, so the market is directional up in the short term (right now).
    Non-Congest is confirmed for the first hour of trading (through 09:25).
    Then the market settles down, continuing a more gentle upward path for the rest of the day.  

  Activity on the 10 and 15 minute Run-Pause Profile tables
    The 5 min table is the most sensitive to price movement. Less sensitivity is often warranted in volatile markets.
    In this case, the 10 and 15 min tables confirm the information from the 5 min table.

  Trading in the Pre-market: Midnight to 08:30
    Since the market opened well above the long alert price, the pre-market is of interest. SP has none. Emini does. 
    Emini SP first price after midnight is 131725, well below the 131880 that triggers the value area breakout.
      131880 was exceeded in the 03:00 to 03:30 time frame
      132050 was exceeded in the 07:30 to 08:00 time frame
      132200 was also exceeded in the 07:30 to 08:00 time frame
    Conclusion: The breakout trader can be well positioned by the open of the day market. 


Run-Pause Data (3 Time Frames - 5, 10 & 15 Minutes)

                       Run-Pause Profile (TM)
             Congestion Periods   UC 06 06  20060505  5m   TIKS
   TimeB   High    Low   TimeE   High    Low   Con/No-Con 
   08:30 132500 132250   08:35 132620 132450  Non-Congest    85
   08:40 132570 132450   08:50 132500 132310  Non-Congest   142
   08:55 132480 132300   09:10 132470 132200  Non-Congest   143
   09:15 132500 132390   09:25 132410 132220  Non-Congest    99
   09:30 132320 132220   09:55 132480 132330  Congest       152
   10:00 132490 132400   10:30 132650 132560  Congest       182
   10:35 132710 132600   12:00 132620 132530  Congest       323
   12:05 132580 132550   12:50 132820 132750  Congest        95
   12:55 132790 132770   13:20 132880 132770  Congest       106
   13:25 132900 132830   13:45 133120 132970  Congest        98
   13:50 133100 133060   15:10 132900 132860  Congest       271


                       Run-Pause Profile (TM)
             Congestion Periods   UC 06 06  12060505 10m   TIKS
   TimeB   High    Low   TimeE   High    Low   Con/No-Con 
   08:40 132570 132420   09:00 132500 132280  Non-Congest   255
   09:20 132490 132220   10:20 132540 132450  Congest       381
   10:30 132710 132560   12:00 132620 132530  Congest       363
   12:10 132670 132590   13:10 132870 132730  Congest       172
   13:20 132900 132770   13:40 133120 132920  Non-Congest   117
   13:50 133100 133000   15:10 132900 132860  Congest       271


  
                       Run-Pause Profile (TM)
             Congestion Periods   UC 06 06  20060505 15m   TIKS
   TimeB   High    Low   TimeE   High    Low   Con/No-Con 
   09:30 132410 132220   10:00 132490 132350  Non-Congest   230
   10:15 132540 132400   10:30 132790 132560  Non-Congest   170
   10:45 132780 132650   12:00 132660 132530  Congest       274
   12:15 132700 132630   13:15 132900 132770  Congest       202
   13:30 132970 132830   13:45 133120 132970  Non-Congest   115
   14:00 133000 132950   15:00 133020 132860  Congest       236




15m Run-Pause Congestion (C)/Non-Congestion (N) Posted on the Profile

            Commodity:  UCM - S&P 500 (CME-IOM)
         Trading Date:  20060505
           Start Time:  08:30
            Stop Time:  15:15
         Profile Type:  15 minute TPOs


         CISCO Meta-Profile  15 MINUTE TPOs
---------------------------------------------------
                          V Tick      15 minute
    Price  TPOs           A Count     Tick Bars
---------------------------------------------------

                               ID = 1 3 5 7 9 A C E G I K M O Q
   133120  X                  1                          X
   133110  X                  2                          X
   133100  X                 11                          X
   133090  X                  6                          X
   133080  X1                11                          X  1
   133070  X1                 8                          X  1
   133060  X12               12                          X  12
   133050  X12               20                          X  12
   133040  X12               16                          X  12
   133030  X12               19                          X  12
   133020  X123              13                          X  123
   133010  X123               7                          X  123
   133000  XY123             17                          XY 123 F
   132990  XY123             13                          XY 123
   132980  XYZ13             24                          XYZ1 3
   132970  WXYZ13            24                         WXYZ1 3
   132960  WYZ13             12                         W YZ1 3
   132950  WYZ13             20                         W YZ1 3
   132940  WZ13              10                         W  Z1 3
   132930  WZ13              13                         W  Z1 3
   132920  WZ13              13                         W  Z1 3
   132910  WZ3                9                         W  Z  3
   132900  VWZ3              22                        VW  Z  3
   132890  VWZ3*             17                        VW  Z  3  L
   132880  VW3               20                        VW     3
   132870  VW3               20                        VW     3
   132860  VW3                6                        VW     3
   132850  UVW               17                       UVW
   132840  UVW                6                       UVW
   132830  UVW               13                       UVW
   132820  NTUV           |  10                N     TUV
   132810  NTUV           |   6                N     TUV
   132800  NTUV           |  15                N     TUV
   132790  KNTUV          |  13             K  N     TUV
   132780  KLMNTUV        |  25             KLMN     TUV
   132770  KLMNOTUV       |  31             KLMNO    TUV
   132760  KLMNOTU        |  20             KLMNO    TU
   132750  KLMNOSTU       |  36             KLMNO   STU
   132740  KLMNOSU        |  10             KLMNO   S U
   132730  KLMNOSU        |  37             KLMNO   S U
   132720  KLMNOSU        |  47             KLMNO   S U
   132710  KLMNOSU        |  21             KLMNO   S U
   132700  KLMNORSU       |  50             KLMNO  RS U
   132690  KLMNORSU       |  14             KLMNO  RS U
   132680  KLMNOPRSU      >  31             KLMNOP RS U
   132670  KLNOPRSU       |  23             KL NOP RS U
   132660  KLOPQRSU       |  15             KL  OPQRS U
   132650  KLPQRSU        |  18             KL   PQRS U
   132640  KPQRSU         |   7             K    PQRS U
   132630  KPQRSU         |  18             K    PQRS U
   132620  CKPQSU         |  17     C       K    PQ S U
   132610  CKPQ           |  11     C       K    PQ
   132600  CKPQ           |  18     C       K    PQ
   132590  CKPQ           |   5     C       K    PQ
   132580  CKPQ           |  14     C       K    PQ
   132570  CDKQ           |  13     CD      K     Q
   132560  CDKQ           |   8     CD      K     Q
   132550  CDQ            |  14     CD            Q
   132540  CDJQ           |  10     CD     J      Q
   132530  CDJQ           |  17     CD     J      Q
   132520  CDJ            |  23     CD     J
   132510  CDJ            |  17     CD     J
   132500  CDEFJ          |  33     CDEF   J
   132490  CDEFIJ         |  17     CDEF  IJ
   132480  CDEFHIJ        |  40     CDEF HIJ
   132470  CDEFHIJ        |  48     CDEF HIJ
   132460  CDEFHIJ        |  18     CDEF HIJ
   132450  CDEFHIJ        |  37     CDEF HIJ
   132440  CDEFHIJ        |  11     CDEF HIJ
   132430  CDEFHIJ        |  36     CDEF HIJ
   132420  CDEFHIJ        |  36     CDEF HIJ
   132410  CDEFGHIJ       |  21     CDEFGHIJ
   132400  CDEFGHIJ       |  49     CDEFGHIJ
   132390  CDEFGHI        |  21     CDEFGHI
   132380  CDEFGHI        |  41     CDEFGHI
   132370  CDEFGHI        |  41     CDEFGHI
   132360  CDEFGHI        |  29     CDEFGHI
   132350 *CDEFGHI        |  38     CDEFGHI
   132340  CDEFGH         |   4     CDEFGH
   132330  CDEFGH         |  20     CDEFGH
   132320  CDEFGH         |  21     CDEFGH
   132310  CDEFGH         |  11     CDEFGH
   132300  CDEFGH         |  20     CDEFGH
   132290  CEFGH              8     C EFGH
   132280  CEFGH             24     C EFGH
   132270  CEFGH             21     C EFGH
   132260  CEFGH             16     C EFGH
   132250  CEFG              10     C EFG
   132230  EFG                3       EFG
   132220  EFG                4       EFG
   132210  E                  1       E
   132200  E                  1       E
                               ID = 1 3 5 7 9 A C E G I K M O Q


Congestion Time Periods Table for Posting to the Profile

ID                TPO   15 MIN CONGEST  NO-CONGEST
 1  08:30 - 08:45  C
 2  08:45 - 09:00  D      1 hour data 
 3  09:00 - 09:15  E      accumulation period
 4  09:15 - 09:30  F
 5  09:30 - 09:45  G                         N
 6  09:45 - 10:00  H                         N
 7  10:00 - 10:15  I                         N
 8  10:15 - 10:30  J                         N
 9  10:30 - 10:45  K                         N
10  10:45 - 11:00  L             C
 A  11:00 - 11:15  M             C
 B  11:15 - 11:30  N             C
 C  11:30 - 11:45  O             C
 D  11:45 - 12:00  P             C
 E  12:00 - 12:15  Q             C
 F  12:15 - 12:30  R             C
 G  12:30 - 12:45  S             C
 H  12:45 - 13:00  T             C
 I  13:00 - 13:15  U             C
 J  13:15 - 13:30  V             C
 K  13:30 - 13:45  W                         N
 L  13:45 - 14:00  X                         N
 M  14:00 - 14:15  Y             C
 N  14:15 - 14:30  Z             C
 O  14:30 - 14:45  1             C
 P  14:45 - 15:00  2             C
 Q  15:00 - 15:15  3             C

Posting to the Profile:
  Use colors: red for non-congesting (N), blue for congesting (C).
  For each TPO classified as N, color it red.
  For each TPO classified as C, color it blue.
  The color blocks on the Profile show the congestion.