Market Wrap

If not for outstanding upside attractions… then how much lower might the market be already?

Pattern points… (Setups and technicals)
Friday”s “unfinished business above” at 2061.50 is not an urban legend, but it may as well be. It wasn”t enough of a reason to avoid that afternoon”s sell-off, or Monday”s.

Tuesday night”s rally through 2044.00 had plenty of room to be retraced without momentum reversing down, and to still be able to resume the overnight rally intraday. And yet, the open took advantage of that room, and not politely.

There are many reasons why Wednesday”s decline was avoidable — those are essentially the oldest and newest. Yet, the decline kept declining, and declining. Getting to 1997.25 — and then 3 points lower reacted to 3 points higher — extending down lower suggests that there is no sponsorship for a recovery.

What”s Next… (Outlook and opportunities)
If that sounds scary, it should. Contrarians might be interested in knife-catching this, but I would want to see how a test of 1981.00 behaves first. Gapping up Thursday back above might be a start at rejecting the decline, even if only to retrace back to where the FOMC statement was made at 2022.00. 

If not for the added pressure of poor earning surprises… then Monday night”s decline might have begun recovering before the open, and extended higher intraday from there. That extra push lower has now been retraced after hours by the reaction to AAPL”s earnings. Perhaps the downside was a tad overdone.

Pattern points… (Setups and technicals)
Because Tuesday afternoon did not probe under the morning”s low before reversing back into the earlier range, the session”s pessimism can”t be labeled as “ineffectual.” Because the afternoon did probe ABOVE the open”s high before reversing back into the earlier range, the session”s pessimism was effective.

Tuesday”s entire session was spent in negative territory. Extending down any deeper through Wednesday”s close — not just through its open — would make a retest of two-week old lows the next likely objective.

But Tuesday”s pessimism can still be invalidated.

The last hour”s break under its 2032.25 sell signal fulfilled its potential down to 2023.00. That held through the close. It was recovered to 2031.00 through the cash session close (and then extended to fresh highs at 2039.00 in reaction to AAPL”s earnings). 

Extending overnight to gap up Wednesday above at least 2041.00 would establish a pretty solid base, having retested Sunday night”s low, and absorbing Tuesday”s gap down. Exiting the open above 2044.00 would be optimal. By the same token, Tuesday”s action chipped away at support, and not rallying from it quickly would be vulnerable to probing lower.

What”s Next… (Outlook and opportunities)
Wednesday afternoon”s FOMC policy statement might inhibit trending after late-morning, or encourage a retracement of trending already underway.

If Monday”s recovery had gained traction… then a shallow opening dip Tuesday could still be likely to recover. But buyers didn”t gain traction, despite the last-minute surge to fresh session highs, so any dip must be contained to overnight action, and recovered to gap up Tuesday, or else lower lows become likely.

Pattern points… (Setups and technicals)
Monday morning”s recovery from Sunday night”s gap down was far more predictive than was the afternoon”s attempt(s) to extend it. Expending too much buying pressure without gaining traction had reset the recovery for morning failure. 

Indeed, the open did fall to 12 points under the pre-open high. But that was absorbed, and recovered entirely.

Lacking a sell signal or bias-down, the recovery was likely to extend. And it did, but not substantially. The balance of the session trended back up, making a series of higher highs and higher lows. Each leg overlapped the 2049.00 area, whose recovery through the open would have targeted 2061.50.

So, at least sellers did not gain traction. But neither did buyers, with the bias environment exit and final hour entry both contained within the noon hour”s range. A last-minute surge to 2054.00 may be in-line with the bigger picture, but its timing was not, so an overnight retracement to 2044.00 is possible in even the most bullish scenario.

What”s Next… (Outlook and opportunities)

Under 2041.00 would more likely extend down to test the oversold RSIs left outstanding at the morning”s 2034.50 low. Avoiding its retest Tuesday would all but require gapping up — and that might require recovering from an overnight dip to 2044.00.

If Friday had wanted to kill the rally… then it had ample opportunity to get the ball rolling well before the afternoon slide. Unless the decline were extending down into Monday”s noon hour, its recovery remains likely.

Pattern points… (Setups and technicals)
Friday morning”s no-bias signal gets every benefit of the doubt for being valid. Having held a test of the 2049.25 bias-down signal through 10:15, an offsetting test of the 2061.50 bias-up signal has become “unfinished business above.”

That doesn”t preclude a detour, however deep and for however long, but usually the unfinished business is resolved much sooner. Regardless, so long as there is unfinished business above, we assume that any drop is only a temporary detour.

Was Friday afternoon”s 13-point slide the end of the detour? It did fulfill its objective of retesting the morning”s low. It did close at 2044.00 support. And it didn”t break under a prior relevant low. All during an otherwise irrelevant Friday afternoon. Enough immediate strength Monday would be credible for at least probing fresh highs up to 2065.00 or 2075.00.

Also credible would be extending Friday”s pullback to 2038.50 or 2031.00. In fact, that would be likely, if this pattern were greeting any other day but the weekend. Time heals all wounds — we”ll see if this one can be healed after two days.

What”s Next… (Outlook and opportunities)
Join us at 9:30am ET for this weekend”s Saturday Review. We”ll discuss the bigger picture”s longer-term potential. And we”ll also do on-demand instant chart analysis. Click here up to 30 minutes before the start time.

If Thursday”s high were a little higher, or a little lower… then we”d have confidence in the rally extending. But rather than close above the next higher target, or leave it outstanding, the target was met and held.

Pattern points… (Setups and technicals)
Thursday afternoon”s steep and substantial rally from 2043.50 quickly fulfilled its 2059.00 target. That”s not patient optimism. The session”s last 45 minutes hovered just under 2059.00 instead of correcting down — i.e. refueling by trapping shorts. That”s ineffectual optimism.

None of which is inherently bearish. But all of which increases the vulnerability to stronger sellers retaking control.

A pullback had room down to 2047.50-2048.75. Still does. Opening any lower Friday could reverse momentum down. But holding support would still require rewarding Thursday afternoon”s buyers for having gained traction (they exited the bias environment above the noon hour”s high, and entered the final hour above both).

What”s Next… (Outlook and opportunities)
Sellers gaining traction through Friday”s open would reverse the trend down, but not necessarily for more than a correction. A lot of Thursday”s range can be retraced without reversing the trend. But reversing the trend would be very bearish for next week.