Week review · w/c 9 January 2023 · A breakout in equities? Give me a break

A look at where we are: a breakout in equities???? Give me a break! But this week should confirm. Last week's close was still inside the prior 2-week range. Everyone calm down and don't get carried away: still in balance.

The latest Fed minutes from the December FOMC meeting reaffirmed the US central bank's commitment to inflation targeting and suggested the Fed would continue to raise interest rates.

Following the latest nonfarm payrolls report, which showed wage growth slowing in December, U.S. equity markets surged on Friday, implying progress in the Federal Reserve's efforts to tame inflation. The Dow and S&P 500 gained 1.5% for the week, while the Nasdaq gained about 1%.

US Treasury yields fell sharply this week, with the 10-year note yield falling nearly 30 basis points (bps) and trading below 3.6% on Friday. The yield curve is still deeply inverted, with the two-year note yielding just under 4.3%.

Crude oil fell more than 7% this week as a rebound in COVID-19 cases in China cast doubt on global demand. The West Texas Intermediate (WTI) crude price, the US benchmark, has dropped to a three-week low of $78.

Notable tweetsThe Short Bear (@TheShortBear) shared his Business Plan Post: the structure all the 7 and 8 figure traders he knows use to operate on a daily basis. In his words: 'Let us build some structure and dominate the playing field!'

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.

Into NFPA 2-way auction into NFP: trade the edges once identified. Observe the extremes for breakout and continuation, else fade the edge with a stop. This creates a coiling effect that released on Friday's NFP. Absorption highs, absorption lows, non-excess highs.

Friday: NFP

1. NFP open 3861: an open outside of Thursday's RTH range. Initial swing: fast money cashes in, but fails to close the gap to the prior close. Anyone rushing in here gets trapped, adding steam to the pressure cooker of short covering. Delta steadily increases with price as short stops are taken out.
2. Attempts to push back below 3861 here are the first clue: a failure to rotate back lower, with buyers holding ground at the ON vProfile VAH and last year's settle.
3. Friday's break above the prior week's highs found buyers, mostly shorts and positioning exiting positions. With volumes increasing as the day progressed into the close, you want to be careful fading.

MonthlyWell inside December's lower distribution, with the lower upper pivot at the 3950-68 area to watch for.

First week, HNY, and the auction is still inside December's lower distribution balance. Buyers need to get over and hold that Dec mid pivot, 3953; then we have another HVN, 3996, and the millennium number. Sellers just need to get us back below the year's open, 3881, to retest 3815.

WeeklyStill closed at 3916, inside the prior two weeks' highs of 3919. Breakout failure or continuation? The Dec CPI weekly lower distribution pivot sits above. If Friday's longs can't hold above the area around the year's open, I expect stops back to the NVPOC.

5-year returnsThe first week averaged 4.8% over 5 years. We were up 1% this week. Based on the prior five years, the following weeks have tended to follow on, but I'm still not getting carried away. Look at the February and March returns.

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.

I have a natural edge by identifying areas of balance and acceptance in the auction. 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.