Week review · w/c 14 November 2022 · Post-CPI: correlations reverse

After a lower-than-expected rise in consumer inflation spurred hope that the Fed may scale down its monetary tightening, U.S. markets rose on Friday to cap a solid week for stocks. The S&P 500 rose almost 6%, the Nasdaq more than 8% and the Dow 4.2% for the week.

The excitement was heightened by loosening COVID-19 rules in China, which boosted oil futures and fossil-fuel stocks in anticipation of rising demand. For the cryptocurrency markets, though, the week only got worse once FTX filed for bankruptcy and most major cryptocurrencies dropped.

In ES, Friday's close was 200+ points above the prior week's settle, and above the 5, 20, 50 and 100 DMA. This was an extreme end to the week's auction, with buyers in strong control.

Last FridayEarly in the week, participants were dealing with the remnants of the previous week's FOMC losses, which saw the auction retest back inside balance from 16/10 but find stubborn resistance at 3715. Friday was a neutral day: the auction closed off the week's lows, having tested and failed lower early Friday. Poor lows (3715: lack of selling?) are an indication of weak selling in this case. Frustrated shorts squeezed late to settle at 3780.25. Friday's late squeeze and hold at a session value area high was an important reference to note coming into Monday.

MondayMonday's buyers were looking to build on the late Friday squeeze, holding above Friday's VAH and the prior week's settle at 3780, to then stage a late break into the close. The open maintained above the prior RTH session and the prior weekly settlement, and a late-session buy imbalance created a break and a clear double distribution. Buyers will look to maintain this break above 3800.

TuesdayEnding the post-FOMC daily OTFD and drawing in more initiative buying, Tuesday's open squeezed back above the FOMC mid but found stubborn resistance at 3867. Buyers were able to hold above Monday's upper distribution high, and the buying imbalance continued, albeit with low volume: long strength or lack of selling? The early Tuesday breakout of the IB was nothing more than a continuation of the post-Fed squeeze. These highs at 3667 would be a key reference for the week's auction following the CPI report.

Late Tuesday, sellers took control of the auction to retest back into Monday's IB range on higher volume: a mid-day reversal traversing down the entire range to break the IB low. It found a solid response into the close from buyers, who stepped above the prior day's lower distribution mid at 3792 for a solid reversal back inside balance: a high-RVOL response, but it failed below the prior absorption zone low at 3856. Very difficult to trade IMO, resulting in a neutral day and 75 points of range.

WednesdayWednesday's focus was positioning into the all-important October CPI. Pre-CPI data, the open auctioned at the lower end of Tuesday's neutral day (balance), with a gap to the prior close that failed to close early. The Wednesday auction failed to break the prior neutral day's initial balance mid and close the gap to the close. 3867 poor highs: lack of buying? Absorption zone low 3856. Longs continued to liquidate late into the session close, into Thursday's hot data: long liquidation into the data event.

Thursday: CPIFollowing Thursday's CPI miss, a violent repricing of risk in the ETH session. A strong weekly reversal began in ETH, resulting in strong gapping: shorts trapped, a short-covering rally beginning, and it attracted HTF buyers. Trend potential.

The open gap at 3894 was above the prior 5 days' range highs (post FOMC), when inside the FOMC VAH high, opening +4% to the prior close. This was an extreme gap, and the likelihood of a close would be small: an extreme opening gap following the CPI release missing higher expectations, emotional trading, opening above 3 days of balance, with the prior week's stops above 3924. Gap rules: look for signals off the open. It will be emotional.

Thursday's open tested back above Tuesday's highs at 3867 to set a low at 3870 before trending higher into the close. The open test of the prior 3-day balance's poor highs was a good signal for continuation. A very strong buying imbalance, and in the PA all selling was absorbed: a tight move higher, a PB to VWAP, and a late breakout post lunch. A typical island day, with no overlapping value and a late spike higher into the close. Passive buying post data release.

CME velocity logic in action on the CPI reaction: liquidity risk, then liquidity low and the CME velocity breakers. For background, see CME Group's 'Understanding Velocity Logic'.

FridayFriday ON traders continued to auction higher, but found strong selling at the prior balance lows at 4016, the 9/11 post-September CPI balance. Friday's gap open tested back to the upper CPI Thursday balance mid at 3951, which was quickly rejected, eventually squeezing into the Friday close to settle at the millennium figure, 4000. VWAP hold. Gap references are strong, but OTF traders tend not to care too much for references: a key clue. Poor highs Friday: a lack of buying, exhaustion? Absorption zone low 4010.

I review the week's RTH before I look at the profiles. Can you see where the price action reverses? Can you identify where price becomes stuck? Look at the overlapping profiles: does this help? Look at last week's references, and look at the shape of the daily profiles.

The compositeA multiple distribution week: pivot 3950, with 3867 into the week. 4010 was the post-CPI and weekly high: sellers at the highs, but no XS. Can buyers maintain the auction above the prior weekly balance highs at 3924?

Further back on the composite: the buying tail, where a strong auction reversal began, a new auction to the upside; the sell imbalance following on from stronger September CPI data; a poor structure area, looking for a retest and repair; and 3704, the post-Fed low.

Why look at the weekly and monthly?Using the composite profiles gives me a lot of clarity in understanding the market. Understanding the story and the basic mechanics of what is going on simplifies almost every other aspect of my trading, especially timing.

By identifying areas of balance and acceptance in the auction, I have a natural edge. I can identify value and the pivots of change. In balance, I look to fade the extremes. When activity leaves an area of acceptance, I monitor the strength and conviction of the move, using volume and value as my guide. As a general rule, if a move is genuine, volume and value will move away from prior acceptance to a new area.