Market Wrap

If all of Friday afternoon couldn’t recover much above Thursday’s close… is it credible to expect sudden strength Monday morning? It’s not un-credible, especially since an entire afternoon was spent ranging narrowly sideways, and not reacting down. But the rally must resume without delay to better ensure its objectives.

Pattern points… (Setups and technicals)[pay]
Friday’s open didn’t gap up, but the likely scenario for gapping down was fulfilled. Tests of both bias-down parameters were rejected through 10:15, putting into play tests of both bias-up parameters. That leaves “unfinished business above” at 1520.25 and 1526.00. Friday afternoon’s bias-up signal was slightly dubious, but not suspicious, and anyway valid, leaving its own unfinished business above at 1520.25, too.

Meanwhile, this was the second consecutive Friday without a new high close. The tactic is employed by rallies to maintain their momentum into the following week. This doesn’t preclude there being a new high, but it does make it less likely, or less likely to be maintained. Friday’s rally did leave “unfinished business above.”

Notice that bonds held firm again despite stocks recovering, while Gold was rocky and at least temporarily probed new lows. This sort of action preceded the original trend change signal two weeks ago. Very interesting now, since the setup tends to be followed by a second one — or, at least a more substantial trend — when the first signal is brief. The last one was brief.

[/pay]What’s Next… (Outlook and opportunities)[pay]
Please join us for the Saturday Strategy Session at 9:30am ET, linked from the sidebar. Among last week’s highlights, in retrospect, were to reiterate that last Monday’s session was likely to decline sharply, and to express suspicion that GRPN had delayed for too long its recovery above prior highs. Bring your stock requests.[/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.

If Wednesday’s close was, in fact, at equilibrium… then it may be responsible for Thursday’s two intraday trending attempts. The noon hour’s rally was convincing, and so was the closing reversal down to new lows. I would have expected the equilibrium influence to develop much earlier, but perhaps the morning’s narrowing range delayed it.

Pattern points… (Setups and technicals)[pay]
Monday morning’s buyers found out quickly that 1524.25 was stiff resistance. The balance of that session trended down sharply. Thursday afternoon’s buyers found the air at 1524.25 to still be thin.

Thursday’s afternoon’s 6-point probe above 1518.00-1519.00, natural support of Wednesday’s intraday and overnight highs, turned into a round trip. Think of it as the market getting out of its comfort zone. Thursday’s pre-open dip under 1514.00 was the same mentality, to a lesser degree.

So, did Thursday’s late plunge to 1509.25 also get out of the comfort zone? At the relevant 3-minute mark before the cash session close, relevant support at 1517.00 was being tested. Gapping up back above it — and quickly extending through 1520.25 — should resume the rally to retest last week’s highs.

Thursday’s late plunge did hold critical support at 1511.00-1512.00, but there was no time to actually reject it. Extending down further to 1506.00 or even to 1502.00 to retrace more of Wednesday’s rally could still recover and resume the rally. But any lower would could find the weekend’s illiquidity forcing buyers and attracting sellers in.

[/pay]What’s Next… (Outlook and opportunities)[pay]
Friday’s econ calendar is fairly weighty. It does NOT include the monthly NFP, but Bernanke is scheduled to speak. My preferred resolution to this pattern continues to be a retest of last week’s highs — if tested aggressively and early enough, the market should find the air to be even thinner. That said, I would still be prepared for a deeper open to simply extend and extend into the weekend. [/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.

If Wednesday’s rally intends to retest last week’s highs… then the session’s steep, substantial rally can’t afford to dip too deeply before resuming the recovery.

Pattern points… (Setups and technicals)[pay]
Last week’s trend reversal needed to reassert itself no later than Wednesday’s open, or else the alternative was likely to retest last week’s highs. There was no hint of reversal as the open surged. Soon, any pullback would have been considered to be buyers refueling for the next leg up.

Interestingly, there was no pullback.

Nothing significant, at least. A 4-point dip from 1506.50 probed under its sell signal fewer than 3 minutes before reversing back up. The break was productive, but momentary, with hardly enough time to trap sellers. The next reaction down during the noon hour was a 3-1/2 point dip that held 1510.00 relevant support. It was no more accumulative despite lasting longer, since it was a noon hour event, and also since it triggered the bias-up.

A deeper and longer consolidation did form from the last half-hour’s consolidation around the 1518.25 objective up to 1519.25. Its break down to 1514.50 still didn’t qualify as a pullback because it happened into the close.

So, a lot of buying pressure has been satisfied very quickly by already fulfilling several upside objectives, all without yet really refueling buyers. Although the attraction back to the highs is still assumed to be intact, a little deeper dip first is probably necessary. Extending higher first, or dipping too deeply, could resume the decline.

[/pay]What’s Next… (Outlook and opportunities)[pay]
Wednesday’s close AT the 1515.00 bias-up target may be “equilibrium.” That suggests Thursday morning’s first couple of trending attempts will be temporary, and reversed in the opposite direction. Equilibrium could be rendered moot by immediately trending far enough away from 1515.00 to break its attraction. [/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.

If last week’s trend change signal is valid… then can the decline afford the hesitation of Tuesday’s bounce? Probably not if it extends into Wednesday.

Pattern points… (Setups and technicals)[pay]
Last Wednesday’s drop triggered a trend change, which Thursday’s drop confirmed. That confirmation gave sellers the leeway to rest on their laurels Friday, to refuel by trapping longs. Friday did bounce, all the way into Monday’s open. Monday’s drop resumed the trend change.

Closing under Thursday’s low confirmed that Friday’s bounce was only a correction, therefore re-confirming the trend change. There was no requirement for Monday’s drop to also close under Thursday’s low. But extending the decline does require at least two days of the trend change’s resumption following Friday’s corrective bounce.

That’s the issue.

Tuesday did produce new lows for a second consecutive session. New intraday lows at 1482.75, under Monday’s 1485.50 low, Monday’s intraday low. Fresh lows after Monday’s close touched 1481.75, which was not touched Tuesday, while Tuesday’s low did probe under Monday’s intraday low.

So, the trend change buys itself a little time to comply with the setup’s typical resolution. In order to serve by proxy to compensate for Tuesday’s delay, Wednesday’s open should break quickly under any relevant support and already extend down considerably. If the new downtrend isn’t clearly underway at the open, then Tuesday’s recovery is probably already extending higher overnight — and another trend change signal would have to wait for a retest of the highs.

[/pay]What’s Next… (Outlook and opportunities)[pay]
Tuesday’s last hour wasn’t likely to range narrowly into the close. Sellers didn’t retake control, so that left only the option to probe fresh highs. If that served the purpose of playing out the clock — like the entire afternoon rally, which regained no ground that the open had not already tested — then the drop should resume almost immediately overnight. In fact, a drop into the futures close touched 1492.00. Is it a start, or an end?[/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.

If Monday’s plunge was sellers pouncing from the shadows… then yesterday’s comments in this space were correct, that Friday’s bounce allowed sellers to rest. So, do sellers need another rest, are did the plunge reinvigorate them to greet Tuesday head-on?

Pattern points… (Setups and technicals)[pay]
After Monday’s plunge, it’s difficult to argue with Friday’s rally being anything more than a corrective bounce. And it’s difficult to argue with Wednesday’s trend change signal, since its low was just broken.

The question now is whether the trend change is ending, or just getting started.

Sunday night’s extra trapped buyers, and Monday morning’s trapped buyers, along with the morning’s very late rejection of its bias-up parameters… Either buyers are being given so much extra rope to hang themselves with, or sellers are being dragged along only grudgingly.

Monday’s plunge probably already rewarded sellers that absorbed the overnight gap up and the open’s attempt to extend higher. But more important is how recently there was such excessive optimism, as Monday’s plunge confirmed. It reflects how much buyers have yet to recognize they’re finished.

That very recent optimism may entice buyers to view this as the cheapest prices in four weeks. That should combine with Bernanke’s post-open testimony (see Econ Calendar for details) to form a corrective bounce. If a bounce doesn’t gain traction, or if the drop were to extend too far overnight for Bernanke to be consequential, then that late selling was just patience… Patience, by very strong-handed sellers.

[/pay]What’s Next… (Outlook and opportunities)[pay]
Post-close is already probing lower to test 1482.00, with potential to 1488.00 and 1471.25. But back above 1488.75 would suggest a corrective bounce underway with potential to 1502.00.[/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.