Market Wrap

[pay]Pattern notes.
There is a debate between whether an ongoing decline remains underway, or if a strong corrective bounce is preparing to begin. Tuesday’s cash session contributed nothing to it.

Monday afternoon’s recovery wasn’t credible for reasons described in yesterday’s Trading Plan. Its complete retracement overnight seemed to confirm this. That same ground was recovered again very soon after Tuesday’s open. The debate could have ended by extending that second retracement into positive territory. But the debate lives on, as Tuesday afternoon’s probes into positive territory never gained any traction.

The natural question is, “what’s the hold-up?” Two probes under last week’s low. Two recoveries back into positive territory. Two sudden stalls. What’s the hold-up?

Tuesday morning’s bias-down environment absorbed bounces, and rejected positive territory. Overnight lows should have been the next stop, but sellers were denied. Buyers absorb selling pressure in order to launch a rally. So, where’s the rally.

The 1039.00 area is now in its third or fourth day of acting as a floor, which is a long time to prevent the prior trend from extending. Simply ticking higher from here won’t be appropriate for a rally to be underway – not even for a 2-3 day corrective bounce.

Absent an immediate and obvious rally at the open, the balance of the morning should be back on defense. An intraday dip to new lows under 1026.00, and a recovery back above Friday’s 1032.25 low close, could be a good start at trapping shorts. The problem is that an intraday dip to new lows under 1026.00 would also be a good start at resuming the decline.

Indicators and Internals.
RSIs were reluctant to get overbought or oversold Tuesday. And much of the day was spent nailed to the middle of its range, reflecting stable buying and selling. This, too, shall pass. Tuesday’s range was, after all, an inside day.

Wednesday’s opportunities.
Perhaps the market’s reluctance to decline is that it knows of news on its way. The morning’s econ reports are interesting only for what they might imply about Friday’s Employment Situation report. The 10:00 report has a history of influencing price action, but not to the point of inhibiting the prior session from trending. Guessing the FOMC’s interest rate decision isn’t rocket science (it’s hardly even economics). Perhaps some news coming in the release? [/pay]

[pay]Pattern notes.
Friday afternoon’s ranging up to 1040.00 wasn’t capable of producing a durable rally Monday morning. Monday afternoon also ranged up to 1040.00. Should the outcome be any different?

Monday’s 1026.00 low was about 4 points under Friday’s lows, so Monday’s recovery was bigger. That might seem to reflect well on buyers. But Monday’s buyers expended more energy without being any more productive than Friday.

Friday’s close was at the afternoon’s lower-end, leaving plenty of room for firming Sunday night to gain traction. In contrast, Monday’s close is already back at the afternoon’s upper-end. By the same token, failing to exploit the afternoon’s optimism would suggest that its buyers weren’t credible.

Friday afternoon’s high, where Monday closed, was also where Wednesday closed. This 1039.00 area may seem to be acting as a floor of the decline, but it is a floor from which the decline hasn’t been able to lift itself.
Until the 1039.00 floor caves in, there will also be potential for a corrective bounce. The same correction that Thursday’s rally wanted to be, and that Monday’s open could have become, producing a quick two-day move up to 1071.00 or 1083.00 to refuel sellers. No corrective bounce is required before extending the decline.

Indicators and Internals.
RSIs were oversold on Monday afternoon’s first 1026.00 low, albeit a higher oversold that produced a 9-point bounce. RSIs diverged positively when 1026.00 was retested – touched again, actually – producing a 14-point bounce (15 points, counting post-close higher highs). Despite bullishness at the low, and two sizable afternoon rallies, RSIs avoided overbought territory. Gains into Monday’s close were not the product of accumulation. A rally must begin forcefully to avoid resuming the decline.

Tuesday’s opportunities.
Monday’s close at the afternoon’s upper-end, where resistance previously existed, makes early weakness credible. It would suggest that the afternoon’s bounce intended to expend buying energy (i.e. refuel sellers) so the decline could resume. Monday afternoon’s rally did make it much easier for Tuesday’s open to reach and recover Monday morning’s 1049.50 high. This attempt would become very likely just upon recovering 1044.50. And its recovery could trigger a two-day corrective bounce described above.[/pay]

[pay]Pattern notes.
Will it be the best of times, or the worst of times? Friday’s pattern was eerily similar to Friday, Oct 16, 1987. And in one respect, it was cunningly different. The similarity implies that this week will start out like Monday, Oct 19, 1987, crashing all the way. That’s if the similarities continue playing out. If not, then this week’s start could be a record-setting rally.

The similarities are all different flavors of productive pessimism: gapping down, trending down through the morning, steep slope, fresh lows into the close, largest daily loss of the series, closing at trend lows. A lot of damage was done to the chart. The one single difference seems almost irrelevant at this point.

But here it is, anyway: the template followed in 1987 extended sharply lower after the noon hour, and this past Friday did not.

The weekend’s impending illiquidity was one of the biggest reasons why I had warned Thursday that a sell-off could target new lows. Perhaps the morning’s mass exodus included those fearful orders trying to beat the afternoon crowd. But the crowd had already been there, done that, and couldn’t pressure price further into the close. The above chart shows a 61.8% retracement, natural support that is capable of preventing a second consecutive lower close from confirming Friday’s break under uptrending support.

You know what they call people who short size into an already deeply discounted close at support? Buyers. Wouldn’t it be cunning of a rally to have started by sucking in so many sellers just to trap them Monday with a short-squeeze. It would be worthy of recovering above Thursday’s high.

Thursday’s rally had matched a template that allowed for an immediate fall back to new lows for the week. It is based on alternating days of greater intensity – Friday’s move was going to be larger than Thursday’s steep rally, whichever the move’s direction. If the same template remains intact through the weekend, it predicts that Monday’s move will also exceed Thursday’s size. If that move is up, then its target would exceed Thursday’s 1054.00 high. Its ultimate move would target 1071.00 / 1083.00. And it would still be a corrective bounce.

Extending down is still the likeliest outcome. (Caveat: Down was likeliest for Thursday, too.) Friday’s new low close was where it needed to be for confirming the decline underway, and for renewing its sell signal. Simply opening weaker won’t be enough to confirm the decline survived the weekend, but extending deeply lower through the open would be the market’s version of an iron-clad guarantee.

Indicators and Internals.
The two charts reveal Friday’s afternoon’s positive divergence among RSIs. Both the 3-minute and 81-minute, among many others, did not become oversold on the afternoon’s last low. That low was in the last hour, but still early enough to be credible. So were at least two others intraday. Gapping down under a prior low can negate this immediately. It can also make a gap up that much more credible.

Monday’s opportunities.
Be sure to read my comments atop the heads-up for the next day’s econ reports – especially the comments applying to today. This particular alignment of news items at 10:00 – and I call it an “alignment” as if it were happening among planets – this alignment has been becoming a fairly consistent disruptor. Gapping up above Friday afternoon’s 1040.50 high and firming would help greatly to absorb the news. That same news is why even the weakest open can’t be taken for granted. [/pay]

[pay]Pattern notes.
Sellers had two chances to be influential again before Thursday late-afternoon, and the open’s gap up ruled out one of those chances. They missed their second chance when the open’s gap didn’t reverse down. Sellers were marginalized. A late-afternoon bout of excessive optimism finally gave sellers a chance to stretch their legs momentarily.

Now, unless 1057.50-1058.00 fails to hold as support through any relevant timing window, the optimism can still bleed into Friday. And it is optimism. Thursday’s gap up, its immediate follow-through, higher afternoon, no corrective dip… It was a reaction to the four-day drop. A correction. Not accumulation.

Then there is NDX underperformance and the Dow’s outperformance. A similar alignment two weeks ago signaled toppiness. They’re doing it again. It’s not a sell signal, but it does reflect the rally’s temporary nature.

The last hour’s impatient buying was quickly punished by a complete retracement. The impatience was also punished by upsetting the direct path underway up to 1071.00-1072.00. The objective is still in-play, albeit on a less predictable path. Unless 1057.50 fails to hold as support.

Indicators and Internals.
The 1-minute RSI diverged negatively at Thursday’s 1064.00 high. The 3-minute RSI was overbought at the time, and the context should have prevented any substantial pullback. But it didn’t prevent a 5-point drop. The outstanding retest won’t undermine the credibility of a sell signal, but 1064.00 is more likely to be retested first – even if only overnight.

Friday’s opportunities.
The calendar is busy through the open. This being a Friday, the morning’s bias environment is likely to persist into the afternoon. So, failing to hold 1057.50 could resume the decline – as in, fall to new lows for the week. A stronger open could once again marginalize sellers until late-afternoon. [/pay]

[pay]Pattern notes.
Good news / bad news: The potential for a 20-point corrective bounce off of the 1051.00-1054.00 target is now 34 points. Its 1072.00 target hasn’t changed, but now it would begin from 1038.00.

The point is that despite Wednesday’s steep drop to sharply lower lows, the potential for a corrective bounce remains alive. “Alive” is a far cry from being triggered, but at least it still has a pulse.

Even after Wednesday’s close, financial media in search of explanations is starting to ask whether the Tech rally is no more. That’s a good question, but NDX answered it two weeks ago. Selling has been ongoing since then.

Only now is everyone taking notice, because it had already become widely recognized. This situation always cuts one of two ways: Either the story is thoroughly disseminated and fully discounted to allow a near-term bounce, or else the decline extends down sharply.

It’s still a tough balancing act not to stay bearish for too long, and not to get bullish too soon. Meanwhile, the trend remains down until it proves otherwise.

Indicators and Internals.
3-minute RSI was freakishly reticent to touch either overbought or oversold extreme. That was for the ES mini. The SP contract somehow did register oversold before diverging positively into the close. But only by a little. And although it had gotten late enough to reflect real opinion, it didn’t rise to the quality of being a buy signal.

Thursday’s opportunities.
The next lower target under 1051.00-1054.00 was essentially 1042.00. This lower target was met during Wednesday’s last hour, and probed a little, but not broken until the last half-hour. The timing isn’t necessarily criminal, but it is always suspicious. The last hour’s first test of 1042.00 reacted up to 1044.00. So, gapping open above it Thursday would trap the culprit. Potential corrective bounce targets would be 1051.00 and 1072.00.
However, Thursday’s likeliest opening scenario is to extend the decline. One method is to gap down under 1036.50, perhaps all the way down to 1027.00-1028.00, along the road to testing the 1023.00 area. Alternatively, opening strength that doesn’t recover 1044.00 could trigger massive disappointment, and a mass exodus.

GDP and Jobless Claims lead the calendar. That may be the least of it, if GDP doesn’t make the most of it.[/pay]