Market Wrap

If the rally”s target were not met before the FOMC news… then its reaction probably would have been bullish. But there being no unfinished business above — at least, not a target to fulfill buying pressure — nothing would require recovering from a negative knee-jerk reaction.

Pattern points… (Setups and technicals)
So, the negative knee-jerk reaction didn”t recover. Here”s something else it didn”t do: extend down. Perhaps the 24-point decline had fully discounted the news. 

Whatever the reason, the knee-jerk reaction”s 1965.50 low held several tests as support. One of those tests triggered a sell signal that attracted new sponsorship (extending deeper than its first 3 minutes). The deeper dip wasn”t very deep at all before bouncing, but it still marginalized sellers. 

Not that buyers exploited it. Not right away, not very much, and not for very long. Rallying 14 points from 1964.00 up to 1978.50 may seem like a lot, but only 2-1/2 points of that was above the knee-jerk reaction”s origin. And the bounce lasted only a half-hour. Then it retraced 61.8%.

Sellers gained no traction for their efforts, i.e. Wednesday”s sponsorship was fully satisfied by the decline it did produce. And despite being well-positioned, closing back under 1963.50 was avoided, which would have put into play much lower lows.

What”s Next… (Outlook and opportunities)
Overbought RSIs at Wednesday”s 1985.75 require a retest, regardless of their being created while fulfilling a target. The wide swings at Wednesday”s lows create a lot of buying pressure that can easily retrace back to Wednesday”s high. But gapping down Thursday would suggest the reversal down was extending, and extending.

If Tuesday afternoon”s rally weren”t so steep… then this entire recovery leg might be more assured of extending much higher. But its steepening slope now places that responsibility on Wednesday”s shoulders, and on whether it can close above the next objective without any interim pullback.

Pattern points… (Setups and technicals)
The template being tracked through Monday”s close was a product of the intraday repressed buying pressure, sellers failing to gain traction despite trying, and buyers not gaining traction despite having unfinished business above. All of which indicated that any path higher Tuesday would gap up to and through 1963.50 and extend sharply higher with potential to 1984.25.

Tuesday”s open did gap up, and the session did extend sharply higher. But the gap up didn”t extend until the afternoon. And then it compensated for its delay, adding 10 points above the morning”s 1968.50 test. 

Closing above 1963.50 has put into play 1984.00. Closing above 1976.00 made holding-long through the close compelling. The only question seems to be timing, since buyers gained traction by exiting the bias environment above the noon hour”s high and then entering the final hour higher.

What”s Next… (Outlook and opportunities)
Rallying should be inhibited ahead of the afternoon”s FOMC policy statement. The proximity to 1984.00 could be predictive for the actual reaction.

If Monday”s open had gapped up… then Friday”s lack of traction could have been rendered irrelevant, and the session could have rallied. Now Monday”s buyers have failed to gain traction too — the bias environment exit and final hour entry were within the noon hour”s range, again.

Pattern points… (Setups and technicals)
So, like Monday”s open, rallying immediately will be the only immediate path higher Tuesday. Probing fresh highs in any other way would be likely to reverse back down into the range.

We have reason to expect fresh highs, since Monday afternoon”s 1960.25 bias-up target was left outstanding and not invalidated. Monday”s post-open action formed an Ascending Triangle in negative territory, which is also “ineffectual pessimism.” 

Gapping up would all but ensure the target will be fulfilled, and also allow durable buying pressure to extend higher. Extending intraday to 1984.00 would not be surprising at this stage. But testing 1960.25 without gapping up would be likelier to reverse back down intraday.

What”s Next… (Outlook and opportunities)
Not gapping up wouldn”t ensure probing fresh highs even temporarily. But only gapping down or immediately sliding through Monday morning”s 1944.50 low would extend the defensive posture, presumably to test 1927.25-1931.00 before resuming the rally.

then does that make last week”s rally more likely, or less likely, to be only a temporary correction? Urgency is an interesting difference between bull markets and corrective bounces. Bull markets take their time, backing-and filling, basing. But the past week”s rally, which extended from the prior week”s “V” bottom, didn”t spend much time trapping shorts. What”s the hurry?

Pattern points… (Setups and technicals)
Not that the recovery was inappropriate. In fact, that was the warning since Thursday”s low, that knee-jerk reactions to news are only temporary. This is as true in bull market as in bear. But that doesn”t mean the fallout is retraced as quickly in both bull markets and bear.

Bull markets thrive on the proverbial Walls of Worry. Time devoted to bearish arguments entices naysayers into shorting or not being long enough. Then the uptrend resumes, causing shorts and the underinvested to buy.

In contrast, Thursday”s overnight fallout — which was substantial — couldn”t even wait for Friday”s open before recovering. The open”s first surge recovered higher than Thursday”s best reaction. And the noon hour”s high completed the entire recovery.

Recovering 1920.50-1921.25 on Wednesday had signaled already that the decline”s last downleg was done, and that its origin would be recovered up to 1984.00. Extending to new highs remains possible, but not required. Regardless, the rally”s corrective behavior continues to suggest that the rally leg is only temporary.

What”s Next… (Outlook and opportunities)
This weekend”s Saturday Review begins at 9:30am ET. Click here to enter. We”ll discuss the market”s status and Sunday/Monday”s setups, then review any charts you request.

If not for the late Ebola headline… then Thursday”s rally was headed to higher highs. The open”s “session-long rally” setup required it. And overbought RSIs at the high intended it. But none of it was fulfilled before the close..

Pattern points… (Setups and technicals)
I fleshed out the headline”s impact on the signals in a post just before the close, linked here. If the news is a turning point in fighting the outbreak, then Friday”s open will likely gap down 24-25 points to attack and probe under the 1921.00 area. There is otherwise overbought RSIs requiring a retest at Thursday”s 1956.25 high.

There”s also a bigger recovery underway, which may still be proved only temporary, but meanwhile targeting 1984.00, with interim resistance at 1941.00-1943.00. 

The targets were put into play by Tuesday”s close above 1920.50-1921.50, which was retested at the low of Wednesday”s steep, deep reversal from 1941.00-1943.00. The round-trip didn”t reverse the trend down, and the following day closed even higher, giving the rally a big, big, benefit of the doubt.

What”s Next… (Outlook and opportunities)
An outbreak in one of the world”s most densely populated cities would have an economic effect. Just the fear has an economic effect. Thursday”s news is not inconsequential. But it is not directly financial, so the rally is likelier to extend so long as Friday”s open doesn”t reject it immediately.