Week review · w/c 3 January 2023 · The year ends in balance

Inside weekA balanced week following Christmas, into week, month, quarter and year end, between the week's balance high at 3883 and balance low at 3804. Volumes declined into year end. Weekly pivot 3844, POC 3862, VWAP 3849.

MarketsU.S. stocks ended Friday lower in a blunt end to the year, dashing hopes of a late Santa rally. Declines in the tech-heavy NQ 100 and in former market darling Tesla (TSLA) were the most significant. Tesla came to the end of a terrible month in which it lost about 40% of its worth. Bond yields continue to rise.

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.

TuesdayA balanced start to the week following the Christmas holiday.

WednesdayWednesday closed weak: these lower prices were rejected.

ThursdayShorts covered, but it did not draw in larger participants: unlikely this late in the year. Non-excess, absorption highs at the top of the week's balance.

FridayA very balanced profile. An early push to take Thursday's lows failed to the upside, resulting in late short covering: a typical island day. It failed to trade back inside Thursday's VA. Don't be fooled: short covering. The daily candle looks strong. Volumes declined into the weekend.

Bigger pictureThe year ended in balance.

Monthly profiles are in balance and weekly profiles are OTFD, but we had a notable inside week in what was a shortened finale due to Christmas.

December saw an early-month breakout above November's highs at 4116, and the run into the important CPI inflation data gave sellers an opportunity to respond. The December auction then traversed November's range lower, where it spent most of its time. Shorts have been consolidating in the monthly lower distribution and will need affirmation soon in the new year.

The monthly non-excess lows at 3789 set a road map to take out November's lows and the October NVPOC, where we have accumulated a cHVN at 3722. A hold below this significant low sets the scene for a retest of the October VAL at 3639 and last year's lows at 3534.

December spent its final two weeks in the lower balance of a notable double distribution (DD). If shorts fail to break below December's lows, I'd expect an early test of 3965 (the monthly pivot). Sellers need to defend this midpoint, or at least frustrate buyers.

A sweep through the monthly cave structure to retake and hold the upper-distribution HVN and the cHVN at 3992 early in the month would not be a surprise. New-year capital allocations tend to be active early in the year, and January tends to be a positive month (see the last 5 years below).

Question: are participants confident, given QT (quantitative tightening), the effect of higher borrowing costs on businesses and consumers, a war in Ukraine and ongoing China Covid issues? We have the FOMC minutes early in the week as well as NFP, then CPI the following week. No need to rush to conclusions.

An inside day into the new year, with some year-end short covering, but be careful reading too much into what looks like a bullish candle formation: the auction is in balance. Compression into year end. Multiple confluence: the all-session MA100 and MA20, the DVWAP and the Dec/Nov mid, pivot 3941.

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.

There are many nuances to trading an inside candle or daily profile structure, and they often yield a good risk-reward set-up. The most important things to observe are the extremes of these structures. Once a breakout occurs, I'm very conscious of pace, volume and participation.

In balance you'd expect the POC, VWAPs and mids to be easily traversed, and the VA extremes to see responsive behaviour. We can often identify potential initiative moves by watching price action at these key levels. I'm not a fan of trading inside out when in balance, but obvious failures or fast rejections of these key areas can be telling.

There's a high potential for fake-outs, but a breakout followed by a pull-back (a hold against a prior key area of interest) is a safer way to initiate this trade.

Watch out for false breakouts. A false breakout tends to happen when a consolidating market initiates away from balance and draws in other, smaller-time-frame traders and stops. That gives opposite HTF traders the chance to use this liquidity to execute larger orders, forcing the late entrants out and creating an accelerated reversal (on higher volume). These moves have a high probability of testing the other extreme of the balance.

Finally, the best moves away from balance come where we have multiple days of tight, overlapping balance, where buyers and sellers have accepted value: a move away from a long-standing consensus. This often happens when the market is waiting for new information into major news events or year end. We just so happen to have been consolidating for the last few weeks into YE 2022.

Questions I often ask:

• Are higher prices drawing in HTF participation, and therefore is the imbalance move from balance likely to sustain?
• Where are buy- or sell-side imbalances likely to find support or resistance, and how are those areas interacted with?
• What is the pace of the auction?
• Are we leaving behind singles and LVNs?
• Are pull-backs aggressively contested and quickly reverted, or is the move consolidating or even struggling?

All moves start in balance and end in excess, although sometimes that excess shows up as exhaustion. How can we identify these characteristics so that we can better reduce risk and lock in profits?

Have a look at what happened to the move out of the 2021 YE balance. The weekly and monthly profiles are below: January's false breakout higher.

What happened last year?HNY 2022: a false break of the year-end week's balance, and we never looked back. The first week averaged 4.8%.