Market Wrap

New year, new format… I have incorporated various subscriber feedback to reorganize the daily outlook. My thanks to all for your input, which I always appreciate getting.

[pay]At the close (How the prior session ended)
Thursday’s last-minute 9-point plunge offers a charming inaugural for this new section. Perhaps the selling was triggered by terrorism fears ahead of New Year’s Eve celebrations, but it was clearly exacerbated by the thin pre-holiday liquidity. The below chart shows the last-minute plunge circled in red.

The drop originated from a narrow 4-hour range that would have ended the year above prior highs. And it would have left much of the “accident waiting to happen” waiting to happen. Dropping half as much would have done enough damage to all but require resolving down, arguing to hold short through the close. But the drop extended so far that little was left on the table to absorb a relief rally Sunday night.

Pattern points (And technical influences)
A relief rally Sunday night could test Thursday’s 1117.00-1119.00 mid-day range as resistance. Recovering above this range could put into play a retest of Tuesday’s 1128.50 pre-open high.

Only probing 1117.00-1119.00 as resistance – whether overnight or Monday morning – would likely dip back down to Thursday’s 1109.75 low. It printed after the cash session close and its RSIs were oversold. Holding its test would not be assured. But gapping down there might be the best chance to find near-term support for a bounce.

Notice what else was accomplished by Thursday’s last-minute plunge. December ended back at the month’s prior highs, which is natural support. Closing any lower would have triggered a downleg whose initial objective is to fill the gap back to Dec 18’s close under 1198.00.

Bottom line (My underlying premise)
Thanks to the exacerbated plunge, little selling pressure remains available to power lower without gapping down. If Bernanke’s interest rate comments he made Sunday are a non-event, then Thursday’s plunge could be rejected by gapping up above it.

Beware of any shallower strength, whether overnight or at the open. For that matter, beware of a probe above Thursday afternoon’s 1119.00 high that has trouble extending. Tuesday and Thursday’s pre-open highs, 1128.50 and 1125.50, haven’t proved very magnetic. A relief rally is likely, but the new year may be throwing aside old obligations. [/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.

[pay]Pattern notes.
We still have traction! And it’s still sellers. Despite recovering the overnight lows, buyers didn’t gain traction. Wednesday’s close did not recover positive territory. In fact, the cash session peaked several times at or just short of positive territory, throughout the day. It’s not as if buyers didn’t have the opportunity.

The entire session was essentially spent ranging in negative territory after gapping down. Combined with the low volume environment, this “ineffectual pessimism” cannot be counted on to resolve higher. An opening rally Thursday might not avoid being retraced entirely by the close – even if Tuesday’s 1128.50 pre-open high were retested first.

Meanwhile, since buyers didn’t regain traction, Thursday’s open is vulnerable to slicing through Wednesday’s 1118.00 intraday low, or gapping under it. Trending is still unlikely in this low volume environment, but a drop has room down to Wednesday’s 1113.00 pre-open low without breaking to new lows.

Indicators and Internals.
The opening peak’s overbought RSIs were eventually retested just after  the close to neutralize its attraction. Except for the overnight drop, RSIs only reflected buying. In this low volume environment, that means weak hands are optimistic, which is bearish from a contrarian perspective.

Thursday’s opportunities.
The year’s last influential news is Jobless Claims, due at 7:30. Its reaction will already be history by the open. A trending attempt isn’t required. And trending without news isn’t likely to get very far before volume all but disappears into the afternoon. If a morning trending attempt has stretched itself thinly, then the afternoon illiquidity could easily reel the market back to unchanged.[/pay]

[pay]Pattern notes.
“Houston, we have traction!” And it’s sellers. Tuesday’s close was negative, after six consecutive winning sessions. The negative close was under the noon hour’s low, in a downtrending session (the afternoon high was under the morning’s high).

The six winning sessions were remarkable for their commonalities – gapping up and probing prior highs, then closing positive but under the open’s peak. Despite price advancing day-to-day thanks to the gaps up, buyers weren’t gaining traction. The setup creates pent-up selling pressure. The string of this setup is an accident waiting to happen.

Sellers finally gained traction in the Dec 10-15 sequence. That didn’t prevent Dec 16 from gapping up to probe intraday highs. This marked the beginning of a steep reversal down that retraced all of the prior breakout before Dec 17’s close.
Now comes this instance stretching Dec 21-29. Will Dec 30 gap up, too? Unfinished business at the 1128.50 overnight high’s “new Globex trend extreme” would like that. The illiquid environment hasn’t been enabling of intraday trending, so such a rally effort would be expected to fail. But no further rally is required, at all.

If Wednesday’s open isn’t gapping up, then it may extend Tuesday’s decline. Tuesday afternoon’s drop fulfilled the morning’s no-bias objective of testing its 1121.25 bias-down signal. Monday morning’s 1116.50 objective remains outstanding, and would be triggered under 1120.00. The drop could reach 1115.00 before volume all but evaporates into the afternoon.

Indicators and Internals.
RSIs were overbought at the 1128.50 overnight high, adding to its likelihood of being retested. RSIs were oversold at Tuesday’s 1120.50 post-close low, timing that makes its retest somewhat likely.

Wednesday’s opportunities.
The strategy of selling opening strength has been proved out by Monday and Tuesday’s post-open action. It would take a backseat Wednesday if the open is firm or gapping up. The 1128.50 overnight high could be met more easily in a less liquid environment. But almost any opening weakness would extend Tuesday’s session-long decline. [/pay]

[pay]Pattern notes.
Monday’s close was slightly positive on the day, recovering from negative territory. But I still view the price action as validating our shift in strategy to selling opening strength. The question is whether we’ll get another opportunity.

Monday’s last half-hour triggered a short-squeeze that peaked within 1 point of its target. So, already a meaningful amount of buying pressure has been expended. It might be sorely missed at Tuesday’s open. Considering this challenge, not reversing down quickly from initial strength would give buyers a chance to gain traction, after all.

Monday’s open gapped up to 1125.00, which doesn’t require a retest, but it’s likely. Reversing back under 1121.25 would signal that the opening strength had been absorbed. Monday afternoon’s dip cleared the way for a test 1115.00. Above 1125.00 is a wild card depending on the timing of its break – and the initial reaction.

Indicators and Internals.
RSIs diverged positively into Monday afternoon’s low, producing a 4-1/2 point bounce up to 1124.00. No other business was left unfinished, and the late bounce’s RSIs didn’t suggest the bounce had ended.

Tuesday’s opportunities.
The econ calendar is the week’s busiest. It contains post-open items that can reverse initial trending. So any initial strength or weakness can’t be taken for granted too early. Monday’s two big moves prove that multi-point moves are attainable in this environment, and also proved that patience is a virtue.[/pay]

[pay]Pattern notes.
Thursday’s session conformed to the week’s pattern of gapping up, probing the prior session’s highs, closing positive but not above the open’s peak. Thursday was the first to develop exclusively above the prior session. Previous intraday lows had probed the prior session’s upper-end.

This optimism is usually excessive when it comes after multiple consecutive gaps up. Dec 14’s session was similar in this regard. It is circled green in the following chart, along with Thursday’s session. Notice from Dec 15’s action that the reaction can be immediate, but not necessarily final. (Even the final reaction after Dec 16’s retest wasn’t final.)

Low volume environments make counter-trend sponsorship almost impossible to form. Monday’s liquidity will improve, but not that much. Absent some negative news item (Friday’s airline terrorist attempt doesn’t qualify), a true test of the rally’s strength isn’t likely before Tuesday. A failed extension of the rally could start attracting sellers quickly. Meanwhile, intraday ranging can widen despite low volume, but no traction in either direction will be gained that way.

Indicators and Internals.
Overbought RSIs at Thursday’s opening high required its retest to the extent that anything can be required in a half-day’s session. Nevertheless, the pullback touched prior highs and recovered everything into the close. No other business was left outstanding.

Monday’s opportunities.
Lower prior highs can absorb immediate selling about 6 points down at 1115.50-1116.50. All price action above 1115.50-1116.50 has been the product of low volume. So, gapping down under it Monday would leave no unfinished business above that might inhibit a session-long decline. Not gapping down or maintaining a break under 1115.50-1116.50 would be likely to fill the gap back up to Thursday’s 1122.00 close.[/pay]