Week review · w/c 18 July 2022 · A failed breakout, a short squeeze into OPEX and a 'P' week
Early gaps lower, a failed inside-week break on Thursday and a short squeeze into OPEX left a 'P' week, with value firmly established at 3856. My weekly and monthly profile reviews mark the levels into a week of Lagarde, the PMIs and earnings.
H 3884 | L 3721 | VPOC 3856 | MID 3803 | VWAP 3821 | SETTLE 3866.75
The week in brief
A 'P' distribution weekly profile, typical of short covering: a strong close to end the week, with value slightly lower on the week but now shifting the monthly VPOC to 3856. A failed inside-week break on Thursday, closing the week above the POC.
Markets
US equity markets rallied late in the week after a report showed retail sales rose more than economists expected, on resilient consumer demand despite higher prices. Markets still posted losses for the week, though, after earlier declines on disappointing earnings from the big banks, and the latest Consumer Price Index (CPI) reading showed prices rising at a faster-than-expected annual rate of 9.1% in June. For the week, the Dow lost 0.2%, the S&P 500 shed 0.9% and the Nasdaq declined 1.6%.
Bonds rallied, with the yield on the 10-year US Treasury note falling to 2.93% at the end of the week as demand for safe-haven assets kept rising. The yield curve inversion deepened, with the two-year note yielding 3.12%, above the 10-year. Oil fell steeply on lingering concerns about a global recession and slowing demand for fuel in the US: West Texas Intermediate (WTI) crude fell from $104 a barrel at the start of the week to just over $97 on Friday.
Day by day
Some key takeaways from the week's profiles. Early in the week buyers showed anaemic demand, with successive opening gaps to the downside (Tuesday opened 1 point inside Monday's range) into Thursday's auction, which also opened with a true gap below the prior range.
MondayA double top.
TuesdayLong liquidation into Tuesday's close.
WednesdayThe CPI data was released prior to the open, an upward surprise to 9.1%. The Wednesday open gap was rejected.
ThursdayThe open gap was rejected and reversed: Thursday's strong reversal. The failed breakout of the inside week to the downside on Thursday was an important event. Early weakness on the open and a drop below the prior two-week lows at 3741 failed to draw in stronger sellers. The early imbalance reversed, closing back inside Wednesday's range and, crucially, back inside the weekly balance.
FridayThe OPEX opening, then the Michigan and inflation expectations reversal: very abrupt. The result of Thursday's failed breakout was a short squeeze into OPEX and Friday's close, ending in a daily and weekly 'p' profile.
The weekly structure
'P' distribution week. OPEX and month end usually mark a turning point, and the weekly auction and the daily candles seem to illustrate this cyclical anomaly. It's too early to read too much into it, and the lows were not the most convincing: typical summer activity. The yearly lows came into the last quarter's OPEX.
MonthlyInteresting: the monthly VPOC sat between two HVN areas, 3744 and 3922, and this week the auction firmly established value at 3856. Beautiful. Not much has changed on the monthly profile. There is poor structure left from an emotional few days post the balance breakout: repair 3944-4067.
Monthly, multi-distribution: H 4922, L 3721, VPOC 3856.
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.
Levels for next week
Monitoring: 3884, the high | 3856, the POC, and the MID area at 3800. The weekly POC and composite HVN at 3856 is an important focal point: buyers will want to maintain the auction above it and target the prior week's highs to end the OTFD. The rest are marked on the weekly profile review, above and below.
Data ahead
Into this week we have some key fundamental macro events, with all eyes on Lagarde, the PMIs and the all-important corporate earnings and forward guidance.
Key events
- Earnings season continues, with more financial firms due to report on Monday, including Bank of America, Goldman Sachs and Charles Schwab.
- Johnson & Johnson, Novartis and Netflix report on Tuesday.
- Tesla, Abbott Laboratories, Baker Hughes, Discover Financial Services, United Airlines, Harley Davidson and others report on Wednesday.
- June housing starts and building permits are released on Tuesday, followed by existing home sales on Wednesday.
- The European Central Bank (ECB) is expected to raise its benchmark interest rate for the first time since 2011.
Monday 18 July
- Bank of America (BAC), IBM (IBM), Charles Schwab (SCHW), Goldman Sachs (GS) and Prologis (PLD) report earnings.
- NAHB Housing Market Index (July).
Tuesday 19 July
- Johnson & Johnson (JNJ), Novartis (NVS), Lockheed Martin (LMT), Netflix (NFLX), Halliburton (HAL), Citizens Financial (CFG) and J.B. Hunt (JBHT) report earnings.
- Housing Starts (June).
- Building Permits (June).
- UK Employment Growth (April).
Wednesday 20 July
- Tesla (TSLA), Abbott Laboratories (ABT), Crown Castle (CCI), CSX Corp. (CSX), Kinder Morgan (KMI), Biogen (BIIB), Discover (DFS), Baker Hughes (BKR), Nasdaq Inc. (NDAQ), Las Vegas Sands (LVS), Equifax (EFX), Northern Trust (NTRS), United Airlines (UAL) and Harley Davidson (HOG) report earnings.
- Existing Home Sales (June).
- UK Inflation Rate (June).
Thursday 21 July
- Danaher (DHR), AT&T (T), Philip Morris (PM), Union Pacific (UNP), Marsh & McLennan (MMC), Blackstone (BX), Capital One Financial (COF), IQVIA (IQV), Travelers (TRV), Freeport-McMoRan (FCX), Dow Inc. (DOW), Snap Inc. (SNAP), Tractor Supply Co. (TSCO), Quest Diagnostics (DGX), Domino's Pizza (DPZ), American Airlines (AAL) and Mattel (MAT) report earnings.
- Philadelphia Fed Manufacturing Index (July).
- Conference Board Leading Index (June).
- ECB policy meeting and interest rate decision.
- Japan Inflation Rate (June).
Friday 22 July
- Verizon (VZ), NextEra Energy (NEE), American Express (AXP) and Schlumberger (SLB) report earnings.
- S&P Global Composite PMI, flash estimate (July).
- UK Retail Sales (June).
Source: Investopedia.
US flash PMIs in focus; Canada releases inflation and retail salesUS flash PMIs are in focus this week, after last month's data pointed to falling US demand as inflation hit 40-year highs, although leading indicators of inflation fell. Growth is expected to slow in July. Meanwhile, after Canadian policymakers surprised the market with a larger-than-expected 100bp rate hike, this week's inflation data will be in focus, with CPI predicted to stay high, around the 8.8% mark (IHS Markit week-ahead report).
Earnings season kicks off with the banksThe corporate earnings season kicks off next week, with some of the largest US banks and financial institutions scheduled to report. JPMorgan Chase, Morgan Stanley and First Republic Bank report on Thursday, followed by Wells Fargo, BlackRock, Citigroup, U.S. Bancorp, PNC Bank, BNY Mellon and State Street on Friday. Other companies scheduled to report include PepsiCo, Delta Air Lines, TSMC and UnitedHealth.
Bank earnings are expected to take a hit from the sharp decline in mortgage refinancing applications as rates have soared in recent months. The big banks are some of the largest mortgage lenders, and some, including JPMorgan Chase and Wells Fargo, have begun laying off workers in response to market losses. Wells Fargo previously reported a 33% year-over-year decline in mortgage revenue for the first quarter, a decline that is expected to accelerate when the bank reports on Friday.
Weekend reading: the ECB rate decisionOn Thursday the ECB is expected to raise its benchmark rate, the deposit facility rate, by 25 basis points (bps) at the end of its July policy meeting. It would be the ECB's first hike in over ten years, taking the benchmark rate to -0.25% from -0.5%, a level it has held since 2014. Surging inflation in the eurozone, currently running at a record annual rate of 8.6%, has pushed the ECB to abandon the accommodative stance of the past decade and prepare to raise rates for the first time since 2011.
In recent months a growing disconnect has opened up between the policy paths of the ECB and the US Federal Reserve, which has raised rates more aggressively, by a cumulative 150 bps since March. The ECB, by contrast, has yet to raise rates in 2022 and is well behind its US counterpart in tackling rising inflation. The divergence, and growing concerns about recession risk, have caused the euro to depreciate considerably against the dollar, and this week it fell below dollar parity for the first time since 2002.
Further reading on the July ECB meeting from Danske Bank research and ING Think.
Key lessons
Trade well and prosper.
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