Footprint Course: Counter-Initiation Lesson II
March 7, S&P500 (ES)
Each week I review key moments from recent price action in the indices. These instances will be analyzed using three methods: the tape / DOM; footprint; and candle chart. Synthesizing the three allows an understanding greater than the sum of its parts, leading to a complete understanding of the auction process. While there are many great resources out there, I am not aware of any that provide such a comprehensive study guide.
Image 1. The rebound effect.
Mean Reversion
Another deeper dive into footprint charts. In this series we explore the three primary concepts revealed using this tool with regard to ‘turnarounds’ in the price action: absorption, exhaustion, and counter-initiation.
The last week has arguably been one of the most volatile in years, with each day over 100 points in range. This is a trader’s paradise.
And unfortunately for many novice traders - a hell of setups failing to work, and wild swings taking out small stops. This can also mean unnecessary revenge-trading, fear to execute, and inability to maintain discipline.
The key is to take it slow and wait for the proper entry - examples of which I share in this series, in using the footprint charts. Over the next couple of weeks we will examine further the three key concepts of price action - absorption, exhaustion, and counter-initiation - while bringing back some lessons from the tape. This will make a full circle to where we began our explorations of trading tools, before we start our theory section on using the market profile.
Image 2. Bessent, the face of the drop?
The last week contained many great lessons and will be a worthwhile review for the remainder of the year. This is a baptism by fire of the Trump 2.0 market for most traders, setting the tone for more aggressive price action than we have been accustomed to in the past four years.
It is precisely the darkest hour before the light. This is true in education, learning languages, relationships (we hope), in war time, as well as in markets. Traders collectively overreacting to price action climax in excess highs and lows, with one side capitulating just in time for no further bid or offer to be found.
The response in the opposite direction can be as or more vicious. Mean-reversion is practically a given, with price often covering back (or giving up) half of a move in quick succession, or more. For the disciplined trader, a mean-reversion strategy gives clear goals for profit-taking.
Entries are far trickier. Especially as I caution to not pick a bottom or top unless you have a strong level to lean against (prior support, halfbacks, range extensions, psych numbers, for example). It is best to let others find the bottom for you.
I have a great example below.