Market Wrap

[pay]Pattern notes.
Like any breakout, Friday’s breakout above 1015’00 required confirmation the following day by closing above Friday’s 1027’00 high. Like any breakout attempted on expiration day, confirmation wasn’t expected. That clue warned us to be skeptical of a retest of the 1032’50 overnight high. More so, expecting a close under 1027’00 made shorting the overnight high’s retest extra compelling.

Monday’s close under Friday’s 1027’00 high did fail to confirm Friday’s breakout. This doesn’t mean Tuesday can’t attempt to trend higher again, especially since Monday afternoon’s dive didn’t damage the rally’s chart. The morning’s extension up to 1035’00 created extra room to absorb the selling. In fact, the afternoon’s dive held a test of its 1021’50 bias-down target. Any lower would have probed Friday afternoon’s lows, where sellers might have gained tractioned.

Extending higher Tuesday would likely match Friday’s gains. This would fulfill the 1043’00 target – without a confirmed breakout having put it into play – very satisfying intraday, but an accident waiting to happen. Ranging narrowly around Monday’s close isn’t likely, so not rallying Tuesday would be mean sellers were making another push effort. Retracing back down to Friday’s 1013’75 opening gap would be difficult to recover. This pattern could turn either way Tuesday, regardless of Monday’s dip.

Indicators and Internals.
Oversold RSIs at Monday’s 1026’50 pre-open low told us to expect its retest. Retesting it early enough could have been accompanied by a positive divergence worth buying. But its test came after neutralizing an attraction to higher prices. RSIs diverged positively at the retest of Monday afternoon’s 1021’50 bias-down target. The reaction never recovered a prior high with resistance up to 1026’50-1027’50. Its recovery Tuesday would target at least a probe of Monday’s highs, potentially extending up to 1043’00.

Tuesday’s opportunities.
Gapping either way from Monday’s close in this pattern would leave a gap likely to be filled, likely to inhibit trending away from it for very long. But gapping either up above 1027’50 or below 1020’50 would be likely to trend 5-6 points in that direction first. Tuesday’s econ calendar is unusually plentiful, unusually staggered, and at one point unusually dense. Econ reports have been helpful to the rally lately – Monday’s decline had no reports. The overwhelming news flow might be difficult to trigger a lasting reaction.[/pay]

[pay]Pattern notes.
Friday’s five-hour narrow range extended into the last hour. Had the session simply continued ranging sideways, then the potential up to 1027’00-1028’00 would have remained outstanding. It was already in play since pulling back to 1021’00. But the last hour’s surge did touch the target. Had the surge extended higher, then a new target might have been put into play. But the reaction fell back down to close under the morning’s 1025’25 high.

These margins aren’t particularly wide, barely 3 points. Expiration’s influence can reduce their relevance even further. But the fact remains that intraday buying pressure was fulfilled, without buyers gaining new traction. Futures closed 1 tick above the morning’s high, so the target’s test wasn’t rejected altogether. Nonetheless, similar to Friday’s prerequisite for durable follow-through, Monday’s open must surge or gap up sharply.

And speaking of Friday’s similarities, its intraday pattern was identical to Thursday. The nearby chart shows the similarities, from the opening surge, through the five-hour narrow ranging, to the last-hour surge that retraced back to the morning’s high. Adjoining duplicate setups rarely resolve the same as each other. This complicates a gap up Monday, which is needed for durable follow-through.

The bigger picture.
So, So, what’s next if a new rally leg were underway? Recall that the rally’s highest calculable target off of July’s low was 1015’00. Rallying any further would be the beginning of a new rally leg, and not another extended target of July’s rally. So, a new rally leg’s character would be different, steeper.

The newly unique character of the next rally leg, if there is one, could also be brief. Its initial target would be 1043’00 or 1051’00, either of which is near enough to be met within 1-2 days. That could be the next rally leg’s end, or the end could follow two more legs forming over the next two weeks. So long as the legs are steep.

Friday’s opening surge would qualify as steep, but not the narrow ranging through late-afternoon. Still, Friday’s new high close was a breakout attempt, awaiting confirmation from a higher close Monday. Expiration day breakouts aren’t typically confirmed, which simply means higher highs attempted Monday would be likely to fail. A rally attempt Tuesday could still extend higher. A higher close Monday would be very suspicious.

Trends don’t peak on Fridays, either. So a steep sell-off Monday would also be suspicious. A weak decline Monday might be buyable. Closing back under 1015’00 before confirming Friday’s breakout would give 981’00 another chance, and put off further discussion of a new rally leg.

Indicators and Internals.
Overbought RSIs at the morning’s 1025’25 high required its retest. Blog updates repeated this outstanding requirement throughout the day, at the risk of sounding like a broken record. It did sound like a broken record. But that’s the way with most expiration Fridays. The last half-hour surge did retest the morning’s high, and went on to touch the next target area at 1027’00 where RSIs were again simultaneously overbought. A strong gap away from this attraction will be needed to invalidate its required retest.

Monday’s opportunities.
The week begins without any econ reports, which hasn’t accompanied up days recently. Two auctions at 1:00 might inhibit volatility by mid-morning. A new rally leg would be interesting because it would have to be steep, and it could be very short-lived. No new rally leg would also be interesting, because the market once again finds itself on an extended bounce when sponsorhip is evaporating.[/pay]

[pay]Pattern notes.
Thursday morning’s rally filled the gap back to last Friday’s 1003’00 cash session close. The last hour’s brief break higher filled the gap back to Friday’s 1006’50 futures close. That’s a wide margin between a single session’s two gaps, but filling one made the other likely to be filled, too.

Had the second test been left outstanding, it could have been relied upon to attract price higher Friday. But it held as resistance on a closing basis. Closing back under Friday’s lower close would have ended the bounce. Not that the close avoided this by a wide margin, but the potential to extend higher remains alive.

Thursday morning’s rally expended buying energy, and Friday’s gap didn’t trigger a pullback. Buyers made the entire session develop in positive territory – let alone at new bounce highs. Yet, the close barely exceeded the morning’s peak. The afternoon’s buyers were productive only in preventing a drop.

Any durable follow-through Friday will need to begin by surging or gapping up sharply. Otherwise, sellers will find an extended bounce whose sponsorship has evaporated. Perhaps expiration can skew price action to avoid any retracement, or to extend the bounce for a retest of 1015’00. But there isn’t much support under 1001’00-1002’00 to prevent a drop back to Wednesday’s late-morning 986’00-988’00 highs.

Indicators and Internals.
Thursday’s tests of last Friday’s closes could have been avoided altogether. Had the overnight reaction down from 1003’00 through 998’00 continued through 995’00 support, then a session-long decline would have been likely. But MACD & RSI diverged positively there. Overbought RSIs at the morning’s high prevented sellers from gaining traction. That was neutralized by new session highs, where 1-minute MACD & RSI diverged negatively, leaving no unfinished business above.

Friday’s opportunities.
A 10:00 econ report on expiration day isn’t just rare, but very unusual. Unusual influences tend to be very influential, so any initial trending should be view skeptically. But this being a Friday, the morning’s bias environment is likely to persist past the noon hour. [/pay]

[pay]Pattern notes.
Friday’s last half-hour surge originated from 995’00. The surge reached 1003’00 during the cash session, and extended higher afterward to close at 1006’50. Monday’s open gapped down sharply from there, under Friday’s range. Friday’s lows in the lower 990’s had become “higher prior lows.”

Wednesday’s late-morning surge sliced through this resistance on the way up to 998’00, where a reaction down held the lower 990’s as support. Closing under 995’00-996’00 by as wide of a margin as possible would have further confirmed that Wednesday’s bounce was still part of Tuesday’s correction. The last print accompanying the cash session’s was 995’75.

Without having rejected the bounce up to 995’00-996’00, the path’s next landmark is likely to be filling the gap(s) back to Friday’s 1003’00/1006’50 close(s). Towards this end, Thursday’s bias-up signal is 1000’75, and its target is 1005’25.

But there’s an alternative pattern. It assumes that Wednesday’s close was just repeating the intraday behavior of trending to a relevant level and then hugging it through the relevant timing window. If so, then a higher high triggered above 998’00 would target 1003’00. The main difference from the bias-up parameter is that this would happen early, and the next move would drop rather noticeably back down through 998’00 and the low 990’s, too. By contrast, just reaching the bias-up parameter’s target would suggest expiration will be pointed up.

Expiration may have already started skewing price action. A gap down under Thursday afternoon’s ~992’00 low would have the same effect as the bias-up alternative described above, dropping sharply to make up for lost time.

Indicators and Internals.
Simultaeously oversold RSIs at Wednesday’s pre-open low suggest it will be retested, which means the interim bounce is just that – a bounce, and not a new rally leg. RSIs were simultaneously oversold at the low of Wednesday afternoon’s pullback testing 992’00, too. Buyers attracted to such aggressive sell-offs tend not to be durable. Retesting a single such setup can be the end of it, but now there are two such pieces of unfinished business below the market.

Thursday’s opportunities.
The econ calendar Wednesday was almost non-existant, but that was just the calm before the storm. Thursday’s econ reports are high-profile, influentially-timed and reported in tandem (see comments here). There’s also a fluid news environment otherwise, and the prior session closed at a relevant area instead of already having broken it or rejected it. Whether session-long trending or intraday reversal, it should be an interesting session.[/pay]

[pay]Pattern notes.
Tuesday afternoon’s price action was unremarkable, except for how unremarkable it was. The morning’s rally had targeted 988’00, which was met going into the noon hour. The pattern wasn’t required to trend again that day, and it didn’t. In fact, the close was essentially 988’00.

The rally targeting 988’00 originated during a no-bias environment. A retracement back down to the 983’50 10:15 price is required eventually. The no-bias trending wasn’t retraced during the same bias window when it appeared, so it might not retrace until Thursday. But the market remains vulnerable to retracing throughout. Rallying any further in the interim would be only temporary.

It’s too late for sellers to regain control by simply trending down from Tuesday afternoon’s extended narrow range. A false break higher would let the rubber band snap back down. Extending higher first Wednesday would find plenty of resistance into the low 990’s, “lower prior highs” from recent trending.

A gap down could relieve sellers from needing a false break higher to kick start the decline’s resumption. Gapping under 983’50 would be preferable. Simply dipping under Tuesday afternoon’s 986’00 low might only probe 983’50 as support, retracing the no-bias trending without the decline resuming.

Tuesday’s gap up and brief morning rally hardly off-set the damage done by Monday’s drop. Friday’s expiration is a wild card that may inhibit a straight path in either direction, or trending at all. But resuming the break Wednesday could find expiration exacerbating the break instead of inhibiting it. Regardless of whether the decline resumes Wednesday, its resumption remains likely – if not required – so long as 994’00-995’00 isn’t recovered on a closing basis.

Indicators and Internals.
All of Tuesday’s intraday divergences had their effect on price action, leaving no unfinished business outstanding.

Wednesday’s opportunities.
The econ calendar is almost bare. The EIA Petroluem Status report will be of special interest considering Crude’s recent volatility – its gains Tuesday afternoon didn’t do much for equities… Reminder: I will be in front of the market only sporadically throughout the day on Wednesday. The Morning Market Tour is scheduled at its normal time, and I’ll be able to jump back on intraday if price action becomes dangerous. [/pay]