Market Wrap

[pay]Pattern notes.
Despite Monday’s 1068.00 low giving way quickly at Tuesday’s open, it wasn’t by gapping down under it. This invalidated the session-long decline setup that had formed. A session-long decline still could have formed, but it wasn’t likely since an optimal setup was just ignored. This made the drop likelier to bounce at its earliest opportunity. That opportunity arrived upon probing Thursday and Friday’s “lower prior highs” under 1065.00.

A big bounce into the noon hour filled the gap back to Monday’s close. Despite the big bounce, and despite it retracing all of the morning’s drop, there was no further improvement intraday. Just as sellers had ignored their own optimal setup at the open, buyers didn’t exploit their own. The afternoon’s range, despite being relatively wide, was only noise.

The open’s dip wasn’t noise. It is considered relevant because its low didn’t form until testing a relevant landmark (Thursday and Friday’s lower prior highs). The bounce it produced was noise, because it didn’t recover back above another relevant landmark. Tuesday’s sellers were more productive than buyers.

That’s not a sell signal, but it raises the bar on what would constitute a buy signal. If breaking above Tuesday morning’s 1072.00 high would have sufficed that afternoon, then nothing short of the prior high would suffice the following day. The prior high was Monday afternoon’s 1075.25 high, and it is being tested by the initial reaction to INTC’s earnings.

Indicators and Internals.
RSIs were oversold at Tuesday’s low, requiring its retest. It also increased the vulnerability to a bounce. Tuesday’s post-open gains on INTC’s news doesn’t change the requirement to eventually retest Tuesday morning’s lows. It just makes that retest unlikely to hold as support.

Wednesday’s opportunities.
Monday afternoon’s 1075.25 high was being tested by the initial reaction to INTC’s earning’s. Testing Monday afternoon’s highs as resistance raises the pullback limit to Monday afternoon’s 1073.50 lows. Exceeding 1075.25 through a relevant timing window would trigger a rally leg initially targeting 1081.75. Opening Wednesday back under Tuesday’s 1072.00 highs would reject all of the trading above it as if it had never happened. And it would reverse momentum down.[/pay]

[pay]Pattern notes.
Friday’s late surge began so late that it was likely to be retraced entirely at Monday’s open. And if retraced at all, it would have been extremely vulnerable to reversing down below prior lows. But the late surge wasn’t retraced. Perhaps the Columbus Day wild card inverted the normal reaction, in the absence of any news or other influences. Instead, the retracement was inverted overnight, and Monday’s open gapped up.

Monday’s teenie-tiny ranging was evidence that buyers didn’t gain any new traction from the gap up. The afternoon’s 7-point plunge was further evidence. It’s not yet a reversal signal, but it can be. It can be a big signal that momentum is reversing down. Otherwise, look out above – for awhile, at least.

The signal that momentum is reversing down would be triggered by next closing under Thursday and Friday’s 1065.00 lower prior highs, and their 1061.00 prior lows. A test of 1065.00 was likely anyway. Now that Monday’s dive has bounced optimistically first, closing under 1065.00 would trap a lot of buyers. Closing under 1061.00 would have been in-line for last week’s momentum peak. Now it would indicate the trapped buyers had become active sellers.

Look out above if the Monday’s dive doesn’t extend down through Tuesday’s close. Not just dip intraday, but close down. Three consecutive gaps up since October’s low were finally followed by selling. Closing above Monday’s 1075.00 resistance would indicate that sellers weren’t going to prevent another double-digit gain. They would eventually bring it back to earth, back to the 1054.00 momentum peak, and probably sooner rather than later. But not very soon if not Tuesday.

Monday’s session would have been ineffectual optimism if not for the afternoon plunge. The optimism was still ineffectual, but the session was no longer exclusively optimistic. Avoiding a lower close Tuesday would avoid exploiting Monday’s only pessimism. This would be ineffectual pessimism, so long as this did not include a failed probe above Monday’s highs. There’s no requirement for either buyers or sellers to exert obvious control at this stage. But whichever does not would be unlikely to regain control very soon.

Indicators and Internals.
RSIs were overbought at Monday’s pre-open high. Pre-open extremes don’t require a retest. Less so when they are retested by proxy, and Monday’s high did come within 2 ticks. RSIs became oversold on the afternoon plunge’s low. The actual price low was less oversold, but still oversold, so its retest is required.

Tuesday’s opportunities.
The most recent cash session trending was up, and its 1068.00 afternoon low printed before the last half-hour. Maintaining a gap down under 1068.00 would signal a session-long decline. An immediate recovery above 1075.00 would be credible for extending higher. The econ calendar isn’t much more influential than the past two days. But it will be interesting how the afternoon action behaves ahead of INTC’s post-close earnings.[/pay]

[pay]Pattern notes.
Today’s special term is: momentum peak. Whether its context is a rally or a decline, a momentum peak can serve as the actual extreme, or it can be exceeded briefly. What it cannot do is be exceeded for any relevant time, and extended through any relevant resistance.

For example, the bounce underway into last week’s open had potential up to 1054.00 (circled red on the first chart to the right). It was probed Tuesday, and the leg that probed it was the session’s high. A close above 1054.00 on the day it was probed would have put into play a higher target. Instead, momentum peaked. Wednesday’s narrow range was not inappropriate in this context.

Thursday’s higher high also was not inappropriate – regardless of gapping up, ranging entirely in positive territory, above prior highs. Indeed, despite fluctuating 10 points intraday, the open’s 1061.00 gap up was re-printed at the cash session close. So, despite buyers gaining ground, they gained no traction. Once again, Friday’s narrow range was not inappropriate.

Of course, Friday’s narrow range also wasn’t overtly bearish. The last hour’s predictable rally had nothing to do with the pattern and everything to do with being a Friday. Friday’s last hour is the week’s least relevant, so is its probe above Thursday’s high. Notice a similar situation following July 30’s momentum peak (pictured in the second chart to the left). The last-hour surge was retraced at the following open, with a vengeance, back down to the momentum high (circled red). This would put Monday’s open in peril.

Rejecting Friday’s last-hour surge need not reverse the trend down. But it wouldn’t be bullish by default. Notice that while July 30’s momentum peak didn’t prevent successively higher highs, the higher highs each failed (third chart to the right again). And they failed back down to the momentum peak, which maintained its attractiveness for five weeks.

This is not necessarily a roadmap for the coming five weeks, let alone for the coming five days. It is only meant to illustrate the relevance of a momentum peak. A decline is still capable of forming and without any further delay. The momentum peak only undermines rally efforts; it is not a sell signal, except that it makes sell signals more credible when they appear.

The bigger picture.
The first opportunity for last week’s momentum peak to undermine a rally is pretty significant. The rally being attempted is also attacking prior highs, the Labor Day rally highs.  This was also a momentum peak (shaded red in the fourth chart’s top-left), and its next day ranged narrowly. That next day was an expiration session. No net movement since then is additional confirmation to the Labor Day upleg’s expiration being tied to Quad Witch’s expiration, which was the premise at the time.

Labor Day also started the quarter’s third month. This is a common time for equity analysts to touch base with the companies they cover. Regardless of the impending expiration’s influence, September’s rally makes clear the analysts liked what they heard. The subsequent dive makes clear the rally fully discounted their enthusiasm. The dive might have brought pricing back down to levels that could react positively to surprises. By the same token, last week’s rally might have renewed the original pricing problem.

We’ll know soon, because quarterly earnings are in full swing by mid-week. The momentum peak suggests that rallies won’t be sustainable. Reacting very well to early results might anticipate more good news than possible. And that’s if the news is good. Monday and Tuesday offer a window to “hunker down” defensively before some disappointments can trigger a sell-off. Of course, the problem with another defensive dip is that it also risks letting sellers gain traction.

There are two important setups from recent lows below that would attract a sell-off. The lowest point was a new Globex trend extreme that requires intraday retest. The following Monday’s bearish opening formation then indicated that any following gains would comprise a temporary correction, and not durable accumulation. If September’s dip down to recent lows was itself a correction, then there is no reason to retest these lows. Not unless the dip wasn’t a correction, after all.

Conflicting motivations can co-exist. The Labor Day upleg recognized corporate fiscal improvement (top-line, bottom-line or both). This may be overtaken by macro-economic factors, currency deterioration, political developments, etc. – any number of concerns that place a higher premium on risk than on earnings. Third quarter earnings improvement may have been real – it must have been real, based on the price action – but it may have been irrelevant. Again, we’ll know soon. The greatest certainty might take until Thursday, with quarterly earnings underway and expiration hours away.

Indicators and Internals.
Last-minute technicals are always suspect (and that’s being charitable). Friday’s last-minute readings are predictive only by coincidence. For what it’s worth, Friday’s last-hour surge ended on RSIs diverging negatively. No other intraday reading left unfinished business.

Monday’s opportunities.
Opening weakness would be credible for having extended beyond the momentum peak. Friday’s last-hour surge up to 1068.50 invites the retracement back down to 1054.00. Back under 1065.50 would initially reject Friday’s last-minute surge. Back under 1063.00 would reject Friday afternoon’s complacency. The wild card is that Monday is a Federal holiday with no econ reports and less liquidity, quiet that invites noise. A bullish environment would exploit this opportunity by dipping. We’ll see how impatient buyers actually are.[/pay]

[pay]Pattern notes.
The premise after Wednesday’s session was that the corrective bounce’s momentum had peaked. A higher intraday high was still possible, albeit vulnerable to closing negative on the day to prove momentum had peaked. This was still the premise at Thursday’s opening gap up, that the close would reject the overnight gains, whether or not first extending higher intraday.

That, or else the bounce was extending back up to prior highs for a retest, if not for a new rally leg to be underway.

Of course, Thursday’s close followed neither path. This isn’t inappropriate for the bearish scenario, since the session was “ineffectual optimism.” The regular trading hours 1061.00 open was also printing printed at the cash session close. Buyers expended a lot of energy gapping up and treading water, without gaining traction in the process. So, the bearish scenario lives to fight another day.

A close under 1061.00 would have been likely to trend down overnight, and gap open under prior highs. Gapping down after holding above 1061.00 is still possible, but less likely. Regardless, the next lower target is the 1051.00-1052.25 area.

A close above 1065.50 would have been likely to rally overnight. There is no unfinished business above or higher target in-play, but a buy signal would get a benefit of the doubt for extending higher. Another gap up is possible, but any follow-through would gain be unlikely to gain new traction, and vulnerable to reversing down.

Indicators and Internals.
3-minute RSIs resisted extending into overbought or oversold territory, and quickly resolved requirement.

Friday’s opportunities.
The day’s econ calendar is so low-profile that is essentially a news-free day. Quarterly earnings haven’t really gotten underway. This being a Friday, the morning’s bias signal is likely to persist well past the noon hour.  [/pay]

[pay]Pattern notes.
Wednesday’s session indicated at every turn – or lack thereof – that trending just wasn’t on the agenda. The overnight range was narrower than Tuesday’s cash session, and the morning’s range was narrower than overnight. Now Wednesday afternoon’s range has come in as the narrowest, yet.

The 1051.00-1052.25 area’s influence persisted. Its lower-end resisted the afternoon’s ranging as resistance. Then the area’s upper-end served as support through the close, after a last half-hour surge was stopped cold at 1054.00.

The area’s 1052.25 upper-end was still being tested when the cash session closed. Its recovery would have suggested buyers were gaining traction. Instead, the day ended with buyers expending buying pressure without gaining traction.

Extended narrowing ranges often trend initially in one direction, and then reverse more substantially in the opposite direction. Wednesday’s late surge might not seem like much (there wasn’t much to squeeze) but it got the ball rolling upward. S&Ps firmed further after Alcoa (AA) reacted strongly to its post-close earnings.

A higher high need only probe Tuesday’s prior high to qualify, and not by simply ticking higher. There is potential to 1062.25 in the process. Gapping up could repeat Tuesday’s pattern and extend higher through the morning. An attack on 1062.25 could still be rejected, which would invert Tuesday’s pattern and trend down through the morning.

Indicators and Internals.
RSIs diverged negatively into Wednesday morning’s higher highs that failed and were retraced entirely. The afternoon’s technicals weren’t very vibrant, but that worked to our advantage in looking for a last half-hour surge. Now the early post-close action is already testing Tuesday morning’s 1056.75 high to neutralize its required retest.

Thursday’s opportunities.
The 30-year Treasury auction at 1:00 isn’t an economic report. Given the Dollar’s renewed focus, it could be as meaningful as the pre-open Jobless Claims data. And given the relatively short “extended narrowing range” that is trying to break higher after Wednesday’s close (now touching 1058.75), another narrowly ranging session is unlikely. The open’s sentiment might last past the open, but it could be very different or much more pronounced in the afternoon.[/pay]