Market Wrap

[pay]Pattern notes.
Tuesday morning’s series of dips were inappropriately timed and yet none was rejected. In fact, another big drop fell much further into the noon hour, probing lower prior highs under 1086.00. That leg’s 1082.00 low filled the gap back to Friday’s futures close, and also held a touch of the afternoon’s bias-down signal.

A recovery maintained back above 1086.00 might not have lasted the day, but it would have been productive. But it wasn’t even probed until a no-bias environment was in place. Despite the open’s inappropriate timing and despite neutralizing so many attractions below, sponsorship for a recovery never developed. What more could they want?

It’s not that Tuesday’s absence of buyers was surprising. Disappointment over the morning’s failed rally attempts was expected to produce an afternoon sell-off. Indeed, NDX tracked this template. Regardless of whether S&Ps spent the afternoon in decline, the afternoon did not recover any relevant area.

Just closing negative on the day is already well in-line with the rally having ended. A close under 1082.00 would have made clear that momentum had reversed down. Unless Wednesday’s open were to start from above 1091.50, bounces would be likely to fail. Filling the gap back down to last Tuesday’s close below 1070.00 might end sufficiently refuel buyers, but it’s more likely to attract bigger selling sponsorship.

Indicators and Internals.
The positive divergence at Tuesday’s noon hour low wasn’t very pronounced. But it was a divergence. So it produced a bounce, but not a very productive one. That is, not very productive except for preventing sellers from regaining traction. Interestingly, RSIs became neither overbought nor oversold through the balance of the day, leaving no unfinished business.

Wednesday’s opportunities.
Besides another busy day of quarterly earnings reports, the session has the 2:00 Beige Book to look forward to. That might inject a lot of volatility into an otherwise slow afternoon, before slowing down again ahead of post-close earnings. Since the session trended up into the close, gapping down under the afternoon’s 1083.50 low would signal a session-long decline. Otherwise, a gap up above 1091.50 is needed to consider buyers even trying to retake control.[/pay]

[pay]Pattern notes.
That was quite a party Monday morning. The 19-1/2 point up-crash seemed to be this market’s way of recognizing the anniversary of 1987’s Black Monday. Perhaps the sudden 5-point dive through the cash session close was an homage, albeit on a smaller 1:100 scale. Maybe there are bigger plans for something impressive on next Thursday’s anniversary of Black Tuesday.

Regardless, the morning’s rally fulfilled targets, and the afternoon’s narrow ranging around its 1096.00 target reflected optimism. High-profile earnings (AAPL, etc.) due after the close was an opportunity for robbing the morning’s rally of its traction. What’s interesting is that it didn’t rob the morning’s rally of any gains. The session ranged sideways narrowly from noon and on, probing highs more than hesitating there.

No unfinished business above was left outstanding, but there will be. In other words, Monday’s close is above prior highs, and anything but a flat open would create a gap back to Monday’s close that wants to be filled. That’s intraday. On a closing basis, despite leaving no target outstanding, tests of existing targets weren’t rejected. However much traction buyers might have lost into Monday’s close, sellers didn’t gain any.

Indicators and Internals.
There was no business left outstanding Monday. All intraday signals were fulfilled. RSIs did get oversold on the post-close dive’s low, but the setup was too late to doom a bounce to failure. Anyway, the Globex open’s initial weakness probed that low, and diverged positively. That produced a 6-1/2 point bounce, without RSIs becoming overbought. Nothing helpful there for the rally.

Tuesday’s opportunities.
Only futures reacted down from 1096.00 to close back under Thursday’s 1092.00-1093.00 high. The initial reaction to earnings was positive, sending S&Ps almost immediately back up to 1096.00 (no new high) while NDX finally probed last week’s highs. If the gains stand up overnight, then the gap back to the futures close will try to attract price back down.

So long as S&Ps don’t gap open at higher highs, sellers could regain control by trading down through the open. If NDX futures exceed their initial 1773.50 peak, then S&Ps are probably exceeding 1096.00, and action at NDX 1782.00 can be monitored to discern whether something more durable is underway. S&Ps aren’t required to probe the 1100’s, but 1106.00 would be targeted next.

The econ calendar isn’t benign, and several bigger banks release earnings pre-open. We viewed three of the past four opens as buying opportunities. Without significant improvement from here overnight, Tuesday won’t be a fourth. [/pay]

[pay]Pattern notes.
Friday’s weakness bordered on being “ineffectual pessimism.” That would be bullish, at least enough for a near-term probe of last week’s highs, and to retest Thursday’s night’s 1095.50 “new Globex trend extreme.” The setup isn’t missing any elements, it just has one too many.

Friday’s open gapped down, probed the prior session’s low, and spent the entire session in negative territory. That’s a lot of pessimism. What makes it ineffectual is the close being above Thursday’s 1083.00 low. Well, it was, and it wasn’t. S&P Cash closed nominally above Thursday’s low. Futures closed under it.

Several factors undermine the last-minute 7-1/2 point dive, such as it being last-minute and 7-1/2 points. The dive’s timing would normally destroy its credibility, especially on a Friday. The dive’s measurement is a difficult pace to maintain. The fact that futures closed under 1083.00 actually tends to be bullish for trapping shorts.

The problem with assuming anything about Friday is that its expiration influences can skew timing and relationships. And Monday’s open probably won’t be conclusive because expiration’s influence is a wild card that stretches through the next session’s morning. It already caused the afternoon’s 6-1/2 point no-bias rally. Otherwise, Friday’s session-long decline would have ended at session lows.

Expiration’s influence also delayed fulfilling Friday morning’s buy signal. But it was fulfilled. Monday’s open might also toy with normal timing parameters, but that doesn’t undermine the pattern.

The bigger picture.
Four arrows on the above chart identify four gaps up during the current upleg from Oct 2’s lows. The optimism could have been tempered by a pullback or two. But Tuesday’s dip is the only probe of a gap. Even Friday’s session-long weakness (highlighted pink) barely pierced the range between Wednesday’s low and Monday’s prior high (highlighted green).

Obviously, the lack of a pullback one day doesn’t prevent the next day from rallying. It just stretches the rally thinly. That can be ignored so long as price action ignores it. But Wednesday’s gap up to new highs failed to confirm Thursday. Whether or not sponsored by ineffectual weak hands, Friday’s selling stopped short of correcting anything.

The upleg has reason to extend higher: the gap back to Thursday’s 1091.75 close should be filled, and its 1095.50 “new Globex trend extreme” requires intraday retest. These attractions are meanwhile a safety net to help recover from further selling, There is room down to 1071.50-1074.00 without ending the upleg. Extending this upleg has potential to the 1106.00 area, perhaps up to 1114.00-1117.00.

Regardless of whether this upleg extends higher, its extreme optimism already suggests that it won’t end gently. Its next stumble should be a tumble – perhaps brief in duration, but still sizable in degree.

Indicators and Internals.
RSIs left no unfulfilled signals. A negative divergence did accompany the last half-hour’s afternoon high, and it did produce a 7-1/2 point dive. Between the signal already having been productive, and the timing not being highly reliable, any further weakness is probably unrelated.

Monday’s opportunities.
Was it, or wasn’t it? Opening strength above 1086.00-1088.00 would all but confirm Friday was ineffectual pessimism. It would also recover Thursday afternoon’s low whose opening break had signaled Friday’s session-long decline. The gap back to Thursday’s 1091.75 cash session close would be in-play, along with a retest of the overnight 1095.50 Globex high.

Sellers would also be marginalized if initial weakness held a test of either “lower prior highs” at 1082.00 (highlighted pink on the nearby chart), or of Friday’s lows – the same tactic that reversed Wednesday and Thursday’s opening dips (highlighted green).

A gap down or quick drop maintained under Friday’s lows would keep sellers in charge through the morning. No high-profile news is due before noon. The earnings and econ calendars are sparse, highlighted by a Housing metric at 1:00, AAPL reporting after the close, and the anniversary of 1987’s Black Monday. Happy Anniversary![/pay]

[pay]Pattern notes.
Entering the session’s last hour at new highs doesn’t often reverse. Sponsorship is attracted to opportunity, and that’s limited when time is limited; so is the ability to work out of a bad entry. Anyway, the last day of the week isn’t much different.

The last day of this week is being entered at new highs. Trending higher Friday through 1096.00 would next target 1114.00-1117.00. Sellers have several opportunities to retake control…

– Buyers might already be done. Thursday’s upside potential was lured higher by the outstanding target at 1090.75. The target was met. Twice. Price can drop simply because buyers have been satisfied, and their sponsorship disappears.

– Buyers might get done fast. Thursday’s last half-hour avoided dipping back under 1088.00, so the rally could still extend a little further up to 1096.00. The air is a little thinner air up there, and a disappointing 9:55 econ report can suck the last remaining oxygen out of the atmosphere.

– Buyers might get scared off. Thursday’s problems were caused by negative reactions to high-profile earnings. Disappointments from BAC or GE before Friday’s open could turn Thursday’s recovery into ballast.

An early drop might mean buyers had lost traction, but not necessarily that sellers were gaining it. Downtrends help those that help themselves, so a drop could be only temporary without also breaking under prior lows. If sellers don’t take advantage of an opportunity to retake control, then the market will suck in buyers to fill the void. The limited time left before the weekend would be off-set by the evidence that sellers weren’t a threat.

Had Wednesday’s breakout been confirmed Thursday, then the potential for reversing down Friday would be negligible. But Thursday’s last hour was still ranging around Wednesday’s highs, instead of breaking it cleanly. This doesn’t mean Wednesday’s session wasn’t a breakout, simply that it wasn’t confirmed, and that the door is open to trend either way Friday.

Indicators and Internals.
Positive divergences were at work again through Thursday’s open to anticipate a recovery. Negative divergences at Thursday’s close suggested the opposite, but lacked credibility for their late timing. It’s not a buy signal, but at least it wouldn’t undermine the credibility of an attempt to extend higher at Friday’s open.

Friday’s opportunities.
Quarterly earnings continue to be a wild card. Even after the open, Consumer Sentiment at 9:55 will still have something to say. Just gapping down under 1088.00 would rob buyers of any remaining traction, but sellers don’t regain control without a solid break under 1082.00-1084.00. Sellers can gain traction higher, by rejecting a probe above Thursday’s 1093.25 post-close high to back under 1088.00. Otherwise, even if just by remaining aloft through late afternoon, the rally could still extend higher into the close. [/pay]

[pay]Pattern notes.
Optimism was thick after Tuesday night’s Globex surge. It was thicker, yet, at Wednesday morning’s open. But the session was likely to trend in one direction or the other, and not trending down was likely by default to trend up. The intraday trending extended higher into the last half-hour.

Does that mean the optimism was absorbed? Not by a big dip, or by extended ranging. If Wednesday’s session rallied despite optimism already being extreme, then the optimism has only gotten more extreme.

We already knew this leg was sponsored by extreme optimism since it originated from Tuesday morning’s oversold RSIs. Since Tuesday’s post-close reaction to INTC fed off that optimism, it’s not surprising that Wednesday afternoon’s surge did so, too.

This template I just described tends to extend the optimistic trending. Regardless of whether the opening tick itself gaps up or gaps down, the uptrend should resume through the morning, targeting 1096.00. Sellers aren’t required to retake control after that, but the possibility would arise because buyers aren’t required past then to maintain it. And optimism would be stretched pretty thinly by then. Extending the rally higher anyway would next target 1114.00-1117.00.

If the trend isn’t persisting through Thursday’s open, then sellers are probably already retaking control. The morning would be just as likely to trend, but down. The earliest warning would be the open either falling hard from a test of the 1091.00 area or else gapping under 1082.00-1084.00. The least likely bearish scenario that is nonetheless possible would be to gap down under 1069.00-1072.00 so Wednesday’s resulting Island would drive price down sharply. Possible. And least likely.

Indicators and Internals.
RSIs were overbought during the formation of Wednesday’s late high. That was during the session’s last half-hour, which can render technicals irrelevant, and sometimes even contrary. So there is no technical requirement to retest the high.

Thursday’s opportunities.
Read my comments here atop tomorrow’s econ calendar, which should help to promote an unusually volatile morning. Earnings include more banks and techs, leadership and bellwethers. Among the higher-profile is C and GS… IBM and NOK… AMD, CY and FCS… MRK and BAX… GOOG and HOG. There’s a lot of news to navigate. The technicals at relevant price points described above will guide the morning’s path. But the afternoon’s motives won’t be revealed until knowing what of the morning’s objectives were fulfilled. [/pay]