Trade Lesson and Pre-market Report for Monday, January 9, 2023

Bottom line for this week:

From last weekend’s Report:

Three of the four US primary trading indices are in unusually tight, mature Balance Areas. This is a market condition highly conducive for a sharp break and the beginning of a trend.

Friday’s trade signals an Initiative break should be just beginning, and if this is correct we should see the indices higher for the next several days, at a minimum.

If the indices retrace more than 50% of Friday’s range, it brings the immediate bullish assumption into serious question.

Daily KRAs:

There are times when Auction Market structure can give a really good if/then scenario. This is one of those times. Auction Market/Market Profile (to be clear, “Market Profile” is simply a graphing format that when properly applied helps to identify Auction Market condition) 101 is to identify Balance Area and then look for the expected break into a trend.

All four US primary trading indices appear to be breaking out of extremely mature and unusually compressed balance Areas into the Initiative (trend) phase of Auction Market development. All four have similar structure as the ES below.

Initiative breaks from Balance Areas (regardless of timeframe) – have a very specific “personality”. They are relentless in the direction of the break, especially early, and retracements are shallow and short-lived. Therefore we know what to look for early next week. If this is “real” we should see higher prices with little retracement into Friday’s ranges.

We also know what shouldn’t happen. As just stated above, we should not see deep retracement into Friday’s ranges. If we do it sets up an immediate bearish scenario that portends a sharp trend in the other direction – in this case, down.

The initial signal the upside break is failing is if all four of the indices retrace below their respective 50% retracement levels of Friday’s session range. Those levels are highlighted in red on the charts below.

SPX

NDX

RUT

DOW

Internals

Breadth expanded to its largest daily close since November 10. This is likely the momentum peak of this rally phase, but by no means does that necessarily imply we are anywhere close to a price high of any significance. Note Friday’s closing breadth was considerably below the momentum generated on November 10, which is another reason to watch carefully for price action to continue to validate the apparent upside breakout.

What we want to watch for next week is continued price strength. Strong closing breadth for the past month has coincided with short-term market highs. If this is a “real” upside breakout, we should see immediately higher prices into next week.

What we should NOT see is a closing -2000 Breadth reading anytime soon.

It HAS to be “different this time”….

…if this is a strong Initiative break to the upside. The previous five times breadth has reached current levels the market sharply reversed.

Below is the rally that started mid-July and ended mid-August. Note breadth held up remarkably well, holding right at -1000 on minor retracements. Also note the first -2000 intraday breadth reading coincided with the top of the rally.