Market Wrap

[pay]Pattern notes.
Tuesday’s session tracked the expected path – trending up through the open, avoiding a sell-off through the morning, then being vulnerable to a sell-off in the afternoon. This is the template that considers the rally from Friday’s low to be only a correction.

The same leg that met the 1054 target also contained the session’s high, meaning that upleg had no other purpose. The rally’s 1042 target was essentially a separate operation conducted exclusively overnight. A single leg that fulfilled both targets would have suggested a bigger second upleg would follow. But the second upleg already followed on Tuesday.

Within moments of Tuesday’s mid-morning consolidation beginning to form, I warned in the chartroom that this was probably a momentum peak. The consolidation might launch another upleg, but it wouldn’t be durable. It did, and it wasn’t. Tuesday’s midsection was a 3-1/2 hour, 14-point slide. A bounce followed, and it peaked upon testing the mid-morning consolidation as resistance. The bounce retraced 61.8% of the midsection’s drop, a healthy correction. Unless Tuesday’s late-afternoon bounce were to extend higher at Wednesday’s open, the next leg is down.

This slide could have been bullish, if its intent were to refuel buyers. Perhaps it did, and the rally’s resumption was delayed. If so, the first requirement would be for Wednesday’s open to gap up above the bounce’s 1051.00-1052.25 peak, and extend higher from there. The second requirement would be to close above Tuesday’s 1056.75 high. Any lesser opening strength, or holding a test of 1056.75 would be unlikely to resume the rally.

Indicators and Internals.
RSIs were overbought at Tuesday morning’s 1056.75 high, requiring its retest. Meanwhile, oversold RSIs accompanied low after low after low, all of which were resolved retested. This means that retesting Tuesday’s high as anything other than noise would be likely to break higher – at least 5 points, perhaps to new highs. The retest can be neutralized overnight, or held as resistance before a bias timing window, without buyers gaining traction. Regardless of how, when or the outcome, the retest will remain an objective until there is a close under 1042, the low of the upleg that peaked at 1056.75.

Wednesday’s opportunities.
Tuesday’s slow econ calendar only gets slower. After Tuesday’s intraday round-trip, an inside day wouldn’t be surprising, especially if the morning hasn’t trended. The afternoon might become paralyzed by anxiousness ahead of post-close earning due from Alcoa (AA), the first high-profile among quarterly announcements.

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[pay]Pattern notes.
Monday’s initial dip wasn’t immediately absorbed at the 1022.00-1023.00 pullback target. But once it finally began, the reaction up produced new session highs at 1031.00 almost immediately. That was stage one. Stage two was two more surges through the day that produced two consecutive higher highs into the 1038.50 peak.

The session’s last upleg followed the afternoon’s no-bias environment lapsing after 2:30, so its gain doesn’t require being retraced. It doesn’t need a requirement to be retraced –  the first stage was a very bearish setup. More than requiring its retracement, the setup taints any subsequent buying, trapping buyers to help fuel a much bigger downleg.

First things, first. Monday afternoon’s 1039.00 bias-up target is still likely to be tested. Perhaps its test will include the 1042.00 bounce potential. If the bounce isn’t rejected there, then the gap back up to 1054.00 could be filled. A close above 1054.00 would be more bullish.

It’s all in the name of refueling sellers, a corrective bounce whose ultimate resolution should include a retest of Friday’s pre-open 1012.00 low. Back under the 1034.00 area would start to signal momentum reversing down already.

Indicators and Internals.
RSIs were oversold at the open’s initial low, requiring its eventual retest. RSIs were overbought at the afternoon’s high, whose retest is also required. Price was able to get away from the low’s orbit since it developed during the open’s first 15 minutes of volatility. The afternoon’s high was still keeping price nearby as of Monday’s close. Its retest overnight would satisfy the requirement.

Tuesday’s opportunities.
The econ calendar isn’t totally empty, but it is comprised primarily of non-controversial items. They might inhibit trending until released, but they won’t influence it without being very surprising. Retesting Monday’s high overnight would be likely to at least touch 1039.00 or even 1042.00. In either case, reversing back under 1034.00 would signal momentum reversing down hard. Falling back under 1034.00 first wouldn’t generate the same confidence of a reversal. It would get a benefit of the doubt, and a tight trailing stop. [/pay]

[pay]Pattern notes.
Thursday’s drop bottomed after having trended down sharply through the noon hour, testing the decline’s 1030 target. Then came a last-minute drop. A last-minute drop that remained under pressure overnight, plunging on the pre-open Employment Situation report. In all, S&Ps dropped an additional 18 points under 1030.

Not a bad day’s work for pessimistic last-minute sponsorship. But it was still pessimistic last-minute sponsorship. There was no counter-trend bounce along the way down to refuel sellers, either. And despite rallying out of the open’s gap down, the entire session traded in negative territory below Thursday’s futures close, only briefly probing Thursday’s cash session close.

Pessimism, uninterrupted selling pressure. This doesn’t even include Thursday’s slide into the afternoon, itself uncorrected. None of which says the pessimism is excessive, let alone that the drop has gotten ahead of itself. What it does say is that the likeliest alternative is to continue dropping sharply through Monday’s open. And vice-versa. If the decline hasn’t resumed through Monday’s open, then it’s probably because a rally is already underway.

Dropping first Sunday night would be tricky. Friday’s pre-open low at 1012 is a “new Globex trend extreme” that requires intraday retest. Probing it overnight makes it less likely to hold as support. A rally’s best hope is to get underway without delay at Sunday’s Globex open, and without looking back through Monday’s open. Alternatively, a short and shallow dip would make a corrective bounce easier. However it begins, a rally’s objectives would include the decline’s 1030 target, higher prior lows around 1042, and potentially the gap back to Wednesday’s 1054 close.

Friday’s 1012 pre-open low shouldn’t be probed by more than 2-4 points, down to 1008-1010.  If 1012 must be tested Monday, then it must be tested after the open, i.e. intraday. Even if its retest produces a bounce back into positive territory, that recovery must extend higher intraday and on a closing basis. Otherwise, the decline’s resumption would become likely Tuesday. And if a weekend of illiquidity didn’t inspire trending, then a week’s worth of liquidity would invite it.

Indicators and Internals.
RSIs were oversold at Friday’s pre-open low. They were slightly higher lows, but oversold nonetheless. However, the setup didn’t happen intraday. So, while its retest is likely, it isn’t required. RSIs were overbought on the morning’s bounce up to 1026.25. Its retest is required. The afternoon’s strength came within 1 tick. Is that close enough for a Friday? Its retest would be preferable, but it’s not capable of overriding a sell signal.

Monday’s opportunities.
The timing of a 10:00 econ report should either reverse any initial trending, or accelerate it. An opening spike or gap, up or down, can’t be taken for granted, not until either clears its prominent hurdle. Hesitant initial trending is going to be less vulnerable to reversing on the news. Back above Friday’s 1026 high after the session’s first half-hour should marginalize sellers for 1-2 days. Back under 1015 would keep buyers on defense while the market does more work probing Friday’s lows, possibly trending down.[/pay]

[pay]Pattern notes.
Last week’s drop ended Friday. Those lows were broken Thursday, which was the fourth quarter’s first trading day. It’s almost as if the interim strength were motivated by end-o’quarter portfolio window dressing. That’s interesting, because we already established last week that the Labor Day rally was tied to quarterly expiration.

More recent has been a drop since Tuesday morning’s high. Was that just discounting fears ahead of Friday’s Employment Situation report? Thursday morning’s jobs reports and their negative preceded some afternoon downward revisions among estimates, and that accompanied prices falling into the close.

Thursday’s drop met this leg’s 1030.00 target coming out of the noon hour, satisfying a lot of longer-term selling pressure. Its test produced a bounce and was retested as support. It was eventually broken, but not until the final minutes that often reflect wrong-way weak hands. The last-minute dive bottomed upon testing the afternoon’s 1024.75 bias-down target, satisfying a lot of near-term selling pressure. Either the last-minute drop discounted enough bad news to absorb it, or the revisions were too little, too late.

Indicators and Internals.
RSIs were oversold at Thursday’s last-minute low. This timing is so late that it tends to reflect weak hands, instead of identifying an extreme that is attracting weak hands. So, an immediate bounce would have no near-term requirement to retest Thursday’s low.

Friday’s opportunities.
Maintaining a gap up above 1034.00 would be the cleanest signal that momentum was reversing up for a sizable corrective bounce. Almost any shallower opening strength would likely be only temporary, probably very temporary, and vulnerable to reversing down sharply.

In lieu of gapping up high enough, perhaps the only way to avoid dropping sharply through the morning would be to gap down sharply at the open, sharply enough to attract new buyers. Of course, this risks attracting new sellers that suddenly grasp the trend reversal and fear the weekend’s oncoming illiquidity.

The Employment Situation report will be followed by Factory Orders at 10:00. PMI and ISM weren’t without some controversy this week, so the market may be in for one last surprise. This being a Friday, the morning’s bias signal is likely to persist well past the noon hour. [/pay]

[pay]Pattern notes.
Tuesday morning’s bearish opening plunge had predicted a bigger downleg to follow. Shock waves from that morning’s volatility needed the entire day to be absorbed. Wednesday’s open didn’t wait long to produce its own plunge, and its own shock waves. Tuesday’s shock waves were absorbed by ranging sideways. Wednesday’s method was to retrace the morning’ entire drop.

The drop was retraced with plenty of time remaining for the bounce to extend into a recovery. It still might, if Thursday’s open maintains a gap open above 1058.00. Follow-through back into the mid-1060‘s might not extend far intraday, but it would probably marginalize sellers until 1072.00 was retested.

Weak firming at Thursday’s open would more likely hold a test of 1058.00 and then reverse down to 1048.00. Its break at any time – with or without first bouncing – would trigger the next downleg. A drop has room down to the 1040.00 area, basically a retest of Wednesday morning’s low. It shouldn’t produce an obligatory bounce, since that’s what Wednesday’s bounce was. So, any lower would confirm the next downleg is underway.

A close under 1046.25 Wednesday would have made it clear that sellers retained control. Closing under 1052.25 still makes the argument, so long as Thursday’s open doesn’t gap up. If the decline does resume Thursday, it might not be very productive until Friday, just in time for the Employment Situation Report.

Indicators and Internals.
RSIs were oversold at Wednesday morning’s 1041.50 low, requiring its eventual retest. RSIs were overbought at Wednesday afternoon’s 1059.25 high. The latter’s retest isn’t required, because it was the product of a surge between the noon hour and the 1:20 bias timing window. But its retest would be likely if 1058.00 were attacked. RSIs were oversold again at Wednesday’s 1047.00 last-hour low, making its retest much more of a requirement.

Thursday’s opportunities.
The econ calendar is busy, busy, busy. Its items are high-profile, and their timing is almost intended to incite volatility. Parameters are described above. Any initial trending can’t be taken for granted. The afternoon may slow ahead of Friday morning’s Employment Situation report, but that would depend upon how the morning shook out. No pun intended.[/pay]