Market Wrap

If that”s capitulation… then this is going to be awhile. Not that capitulation would allow a new rally to new highs to just get up and walk out of here with a few scratches. But capitulation would end the decline. Rallying already, from this stage and from this level, would only refuel sellers.

Pattern points… (Setups and technicals)
Good news / Bad news… The decline”s next lower target at 1824.50 was recovered through Wednesday”s close. That”s actually the bad news. Closing under it would not have been bullish, but it could have become bullish by closing Thursday back above the morning”s 1860.75 high. That setup can”t happen now.

And since Wednesday”s actual low was a test of the 1813.50 room for noise under 1824.50, closing back under 1824.50 would make new lows only a formality. The next lower target would be 1766.00.

My template was looking for the 1824.50/1813.50 low. It was looking for the bounce, and it was looking for the bounce to be only a temporary correction up to 1840.00. Two out of three?

Extending not only above 1840.00 but also to test the morning”s 1860.75 high was unexpected. It still may be only a temporary correction — the afternoon”s recovery came nowhere near positive territory. But the template was looking for fresh session lows.

Slightly higher highs overnight or Thursday morning could test 1872.50 first. Gapping up that high could form an Island Reversal. Perhaps Wednesday afternoon”s rally will be only a duplicate of last Wednesday afternoon”s rally (in reaction to FOMC news), and reverse down immediately Thursday. 

What”s Next… (Outlook and opportunities)
Thursday”s econ calendar is like a clown, packed with high-profile reports and Fed speaker after Fed speaker. Those clowns are our insurance against a narrowly ranging session.

If “fool me twice, shame on ME”… then who”s to blame Tuesday? Third consecutive morning-long rally fails to avoid afternoon slide to fresh session lows.

Pattern points… (Setups and technicals)
There were more similarities between Friday and Monday than between them and Tuesday. Tuesday”s reversal down was better developed by the bias environment exit. Tuesday”s drop barely probed under the morning”s low, and only attacked the overnight low. Tuesday”s close firmed.

But nothing about any of the sessions is supportive of a bottom forming. And three consecutive failed morning rallies is “hope springing eternal,” also known as an accident waiting to happen.

Capitulating at Wednesday”s open — if not already overnight — could clear out sellers so that an actual bounce might be launched, That window is running out of time, with expiration”s influence looming.

What”s Next… (Outlook and opportunities)
Wednesday”s close may trigger the WedEX signal, which forecasts bias into and out of the expiration weekend. The setup has several bells and whistles and plenty of moving parts. But generally at this stage of the pattern, a bullish signal would require closing above Tuesday”s high. Bearish mostly just needs to close negative on the day.

If you want to learn how “lower prior highs” and “prior lows” can influence price action… then be sure to watch the Market Wrap recording from Monday”s close.

Pattern points… (Setups and technicals)
Friday and Monday both recovered from probing negative territory, all the way through the afternoon”s bias environment. Similarities didn”t end there. The same traction inputs triggered Monday afternoon as did Friday — including the 3:10-3:20 timing windows. And they produced the same last hour relentless slide. 

But their similarities were different in one very important way: One was Friday, and the other was Monday. That is to say, only one sell-off was encouraged by the impending two days of illiquidity. The other sell-off feared something else. The sky collapsing?

Sort of. This is expiration week, which can give new meaning to illiquidity — for those who are on the wrong side of the market. Too long is too long is too long. The impending expiration isn”t causing pessimism, but causing participants to quickly discount the pessimism.

At least expiration is a specific event. Its end may be a catalyst for ending the decline. There”s nothing bullish about that in the near-term. Recall that the Friday preceding Black Monday 1987 was expiration.

What”s Next… (Outlook and opportunities)
Friday and Monday afternoon”s towel-throwing is ready to branch out from being an afternoon hobby. Unrelated is the three consecutive substantial downdays on Thursday, Friday AND Monday, a sequence that tends to extend considerably without delay. If not, then any interim bounce will be considered only a temporary correction.

If Thursday”s drop was exaggerated by accelerated selling… then what exaggerated Friday”s drop? Maybe it wasn”t exaggerated.

Pattern points… (Setups and technicals)
Friday”s market proved it is following the template that we”ve been assuming. From the deceptive post-open rally that resolved in the session”s first plunge, to the afternoon”s slide to sharply lower lows… The word is bearish. And that word is an understatement.

The pattern of fighting back from new lows Friday morning only to trend down to new lows Friday afternoon is not abnormal. But it”s uncommon for Fridays. When it does happen, it tends to extend down on Monday. A lot.

My templates are processes of elimination, as developing price action continually limits its possible resolutions. Thursday”s bias environment exit shut the door to an upleg developing before a downleg could begin. Appropriately ugly price action barely hesitated.

I could point out the similarities to Fri, Oct 16, 1987, the day preceding Black Monday. But I don”t want to fear monger too much. So, I”ll point out that Monday”s low held a retest and never looked back as a new rally formed. Those were the days.

What”s Next… (Outlook and opportunities)
Were any stocks of interest shaken around during the past couple of weeks? Join us for this weekend”s Saturday Review to request an instant chart analysis. We”ll also review the bigger picture, which has been somewhat active lately. It”s at 9:30am ET, at this link.

If last Thursday”s low was so impressive… then why was it retested Wednesday? And why was it attacked this Thursday, despite substantial bounces in between? If this are intends to be a bottom, then where will it get more buyers ?

Pattern points… (Setups and technicals)
Thursday”s noon hour exit probed a fresh session low down to 1924.25, down about 37 points on the day. It took 1-minute and 3-minute RSIs oversold. The 1924.75 bias-down target was being tested. The oversold bounce”s reaction up reached 1935.75.

Why is the market still defending this area, and why is it defending it at all the wrong times?

Surely, some portion of selling pressure was accelerated from Friday”s planned exits trying to get out before the morning”s drop extended. Some portion was sellers that might not have sold but for the drop”s slope. That selling is done.

Usually, when those two groups of sellers apply extra pressure, the close will have recovered a relevant price to trap them. Thursday did not. Gapping up immediately Friday has 14-16 points before doing so by proxy, back above 1936.00-1938.00.

Blipping down to test 1910.00 could discover sellers are done already, and spend the rest of the morning attempting another intraday surge. Gapping down and staying down, or temporarily bouncing back to Thursday afternoon”s range, could still double the size of Thursday”s 40-point decline.

What”s Next… (Outlook and opportunities)
Watch out for the Friday Factor this wee, which normally sucks the afternoon of volatility. That”s because trending is difficult to start in a low volume environment, as is trending through a resistance or support. This Friday isn”t itself so light, but it precedes a typically light session — Monday”s Columbus Day holiday. Pre-holiday positioning may have been affected by Thursday”s slide.