A Review of the Major Stock Indices Through the Lens of Auction Market Principles and the Market Profile Graph

Tom Alexander

Tom Alexander

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Since we are now into the fourth quarter after historic second and third quarters it is a good time to assess where the stock market(s) may be by using an increasingly popular form of analysis based on auction market principles. This is an analytical technique first posited by Peter Steidlymayer, a CBOT floor trader, in the early 1980’s. The principles have evolved and been refined through the years and have been proven to be a statistically valid approach that is incredibly robust across all freely traded markets and timeframes.

Don Jones is responsible for taking the early qualitative concepts and applying rigorous testing and research that he still conducts to this day. His research has found a valid statistical edge to market behavior based on this form of analysis that can be used as a base platform for developing a trading model.  I will outline the general concepts in future articles, but today let’s take a look at where we are and see if there is anything presently useful that auction market analysis may be telling us.

The profile graph is a tool that provides a unique display of market activity. It displays where the most as well as the least activity occurs in a given time frame by highlighting activity on the horizontal scale. The level of activity determines relative value to a given time frame. This is value as determined by the market participants themselves. The area of greatest value to the participants will contain the most activity; the area of least, or most “unfair”, value will have the least activity.

This auction process tends to form the visual of a bell shape of a typical statistical distribution. An objective and consistent way to determine a trend is to notice the migration of value. As long as value is moving higher the trend is up; if it is moving lower the trend is down. This is a consistent and objective way of viewing market activity. The initial signal that there may be a trend change in progress is when the High Volume Node (HVN – area of greatest value) of the most recent composite profile is exceeded in a counter trend move.

Let’s look at the S&P, Russell 2000 and the Nasdaq 100

The S&P has formed higher HVN’s persistently since the October 2 low. At this point in time, the initial signal of a potential correction being underway is a close below the low of 10/19 at 1086.48.


In the Russell 2000 the initial signal of a correction underway is a close below the low of 10/19 at 614.43.

Russ MP

In the Nasdaq 100 the initial signal of a correction underway is a close below the low of 10/19 at 1732.02.

Naz MP 091019


Letting the market itself be the determinate of value is a consistent and objective way to make trade decisions. There is not a more robust, objective or consistent way to analyze a market. In future articles we will get more into the details of this form of analysis and we will continue to update what we are seeing through this methodology.

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