Market Wrap

[pay]Pattern notes.
The 1005’00 area remained relevant. Moves away from it were retraced, both Sunday night and intraday Monday. A bounce from session lows testing 998’25 was at 1005’00 when the cash session closed. The bounce extended back up to the morning’s 1007’75 high before the futures close.

Friday’s “breakout” close above prior highs was already suspicious. Its confirmation by closing at higher highs Monday would have been suspicious. A higher close now wouldn’t be considered an extension of Friday’s gains, and it would require its own confirmation.

Monday’s session was “ineffectual pessimism.” Its price range developed exclusively in negative territory under Friday’s cash session close. This is often followed by an early rally effort, normally testing the prior day’s high. Back above 1009’00 would suggest that move was underway, still having resistance at 1011’00 and at 1013’00. A retest of prior highs is not the same as a breakout.

Monday afternoon’s low around 999’00 printed before the last hour, and Monday’s last trending was up. Maintaining a gap down Tuesday under 999’00 would signal a session-long deline. Tuesday’s session isn’t required to trend in either direction as Monday’s was not, but Monday’s ranging should have cleared the way.

Indicators and Internals.
1-minute RSI diverged positively three times through Monday afternoon’s decline. The last finally recovered above a prior high to avoid signaling a much steeper decline underway. The recovery was triggered by a positive divergence whose setup was fulfilled. The 3-minute RSI became oversold at Monday’s last-minute high, but the 1-minute RSI was already deteriorating out of being overbought. There is no requirement to trade any higher.

Tuesday’s opportunities.
Monday’s price action was essentially un-influenced, the product of a news-free environment. In the middle of two expirations, no econ reports or earnings announcement. And the session ended flat to lower. Tuesday brings a steady flow of econ reports and events through the morning and into the 1:00pm auction, one day prior to FOMC news. None of it is likely to trigger durable trending, so unless sellers start pushing back harder Monday night, a temporary attack or test of Friday’s highs is likely – and a reaction down from there. [/pay]

[pay]Pattern notes.
Friday’s open gapped up 10 points to test 1005’00. That’s where the two prior days had peaked. Despite rallying intraday to 1015’00, that’s also where Friday nearly closed. Seems like a relevant area.

The actual close was above the 1005’00 prior highs. Does that qualify as a breakout? Q: What do you call a doctor that graduates last from medical school? A: Doctor. By this standard, Friday’s close was a breakout, barely.

Anyway, breakouts require confirmation by closing higher the next day. The prior week’s breakout attempt wasn’t confirmed the following day, and the next four sessions’ higher highs kept retracing back into the prior week’s range. That sequence still extended higher, eventually. So if Friday’s breakout was valid, then Monday shouldn’t hesitate extending higher and closing higher.

Note that these are two separate parameters: extending higher initially doesn’t necessarily mean closing higher, or even positive. If Monday’s open isn’t extending Friday afternoon’s drop, then it’s probably because buyers are starting out strongly. An upleg here would be steep and fast-paced, and possession is nine-tenths of the law, so an opening surge would get a benefit of the doubt, until technicals deteriorate or a pullback pulls back too far. Which is a good segue into this week’s:

The bigger picture.
The extended target above 981’00 is 1015’00. It is the highest extended target of all prior patterns. To extend higher here would not be to extend higher, but to start an entirely new rally leg. Its targets would not be extended products of prior patterns, but of bigger formations determined by a confirmed breakout. The 1015’00 area also represents a retracement back to the resistance of another prior high – a 38.2% retracement of the decline (see nearby chart).

Meanwhile, the past week has been forming a setup last seen at June’s top. Multiple consecutive days spent ranging sideways, probing higher highs intraday, but never producing a breakout close. The clearest correlation is June 10’s resemblance to last Thursday’s opening surge that immediately reversed down to the range’s lows intraday.

June 10 resembled Thursday also because of their next day’s reactions. June 11 probed June 10’s brief high, and still reversed back down into the range. Similarly, Friday also probed the prior day’s high. Of course, Friday went on to exceed the prior range, and then stayed there. The difference is irrelevant.

The nearby chart of June’s top identifies its counterparts to the earlier chart showing last week’s ranging. Each chart’s green circle is the first day’s brief opening surge, and circled in red is the next day’s closing drop. June’s second day barely probes the green circle’s high, but last week’s second day probe sharply higher, and each green box shows why: June’s first day recovered much of its morning loss, while Thursday left more buying pressure unrealized and still in its potential form to fuel Friday’s open. The second afternoon’s drops (circled red) fell proportionately, which may be difficult to discern since Friday afternoon’s was supported by prior highs.

An exact match in setups doesn’t necessarily resolve similarly. And a similar resolution doesn’t require the exact same setup. But some properties of the setup require a specific outcome for a specific direction, or else a different outcome would resolve in the opposite direction. June’s instance of this setup didn’t happen to being violently – it produced a major decline because it began violently.

Immediately duplicating Friday’s rally to another new high probably takes off the table a violent resolution down. There’s still potential, so long as Friday’s late dip also repeated to prevent buyers from gaining traction. Meanwhile, dropping violently, immediately, extending down throughout the day – it still wouldn’t turn momentum down. Momentum won’t turn down until this rally does the one thing it has avoided since July’s low by closing under a prior low. Currently, that is 993’00-994’00.

Indicators and Internals.
RSIs were making lower overbought highs during Friday afternoon’s prior high. This non-confirmation wasn’t quite a negative divergence. Technicals continued deteriorating into lower lows along with price into the close. Nevertheless, there is no requirement to trade lower or higher left open from the intraday range.

Monday’s opportunities.
The news flow takes a break as the week gets underway. Absent any weekend developments that might influence price action, Monday’s open can be almost a pristine reaction to Friday’s retracement from session highs. The econ calendar heats up Tuesday, not the least of which is FOMC’s meeting. For now, Monday’s opening action is likely to reveal whether it is buyers or sellers that are in charge.[/pay]

[pay]Pattern notes.
Thursday’s opening surge tried and failed the same breakout that stopped Monday’s similar opening surge. And similar to Monday, the post-open pullback bottomed at 990’00, last Friday’s “lower prior highs.” Thursday’s drop started from almost 1008’00, while Monday’s opening surge peaked under 996’00. Interestingly, Thursday’s bounce from session lows peaked upon testing 996’00.

Monday’s 6-7 point dip pales in comparison to Thursday’s 18-point swing. Originating at higher levels helped to absorb Thursday’s bigger drop, and inhibit sellers from gaining traction. Session lows chipped away further at 994’00 support, as did the prior two days. Any trending down Friday must at a minimum break this level through the open. Any trending up must immediately recover above the first test’s reaction high at 999’00.

More than one full week has been spent ranging around 994’00. Its the longest such string of the rally from July’s lows, and a long string for any rally. It’s a little long for credible trending, but appropriate action for topping. Sellers must take control soon, or else the market will suck in buyers to fill the void with a steep rally leg. Look for a “bigger picture” update this weekend regardless of Friday’s resolution.

Indicators and Internals.
Technicals left no unfinished business Thursday. The afternoon’s low narrowly avoided printing with an oversold 3-minute RSI. That would have been in tandem with oversold 1-minute RSI, requiring the low’s retest. But there’s no technical requirement otherwise to retest Thursday’s low.

Friday’s opportunities.
The aging tradition I described here yesterday is now all of five days old. Yet another opening probe of prior highs is unlikely, especially from the range’s lower-end. Less likely is rejecting another probe of prior highs. The same could be said for a failed break under 994’00 – that its break is unlikely to recover yet again. Thursday’s close was still testing it as support, so an attempt to break lower is likely. Much depends upon whether that break is preceded by a bounce in reaction the Employment Situation report.

Reaction to the report will set the open’s tone, but not necessarily for the day. This being a Friday, the morning’s bias tends to extend through the noon hour. A no-bias signal would make trending unlikely until the session’s last 90 minutes. By the same token, trending early enough in either direction could extend into late-afternoon before turning sideways. [/pay]

[pay]Pattern notes.
After Wednesday’s opening dive, the morning’s bounce peaked at 996’50. That’s being tested as support two hours into the overnight Globex session. The afternoon’s interim 7-point gain to 1003’75 is gone. Is it a precursor to also retracing the morning’s 5-point bounce?

Traditions don’t last long in the market. They tend to start pretty quickly, and can appear often in a relatively short time frame. Buyers recently established a new tradition of probing higher highs without closing above prior highs. The past three sessions have traded around last Thursday’s 994’00 high – the interim session traded below it without letting sellers gain traction.

Coming into the market so easily, traditions also don’t last very long. Last week’s first three sessions were “ineffectual pessimism” that stopped suddenly with last Thursday morning’s surge to 994’00. Now this week’s first three sessions have formed a type of “ineffectual optimism. Is this new tradition about to end suddenly?

Wednesday’s entire intraday recovery never turned positive on the day. And now Wednesday afternoon’s gains have been retraced entirely back down to 996’50. Extending the drop overnight back down to yesterday’s lows would suggest old traditions had been retired again. The new tradition’s purpose would be to retrace the relentless upleg from July’s lows. Regardless of direction, it’s about time for a new tradition. So, gapping up Thursday up above recent highs would suggest the new tradition was all about resuming the rally’s steeper slope, well beyond the 1005’00 or 10015’00 levels.

Indicators and Internals.
1-minute RSI was barely overbought at Wednesday afternoon’s high, which would have been simultaneously overbought with the 3-minute RSI. So no retest of Wednesday’s high is recovered. Meanwhile, RSIs have managed to avoid becoming oversold so far during 7 points of decline off of Wednesday’s high.

Thursday’s opportunities.
Any indication overnight of gapping down under 993’25 would probably be past the point of no return. Wednesday’s bounce would be considered entirely absorbed so long as bounces then held 997’00 as resistance. It would even reinstate Wednesday’s attempted gap down, which remains in-play as buyers never regained traction with a positive close. The likely alternative is not to remain within the recent range, but to gap up above recent highs around 1004’00 and extend sharply higher. Jobless Claims is pre-open, and any trending prior to that would be tentative. [/pay]

[pay]Pattern notes.
Monday’s breakout session was followed by a gap down and sideways ranging. That is, until the session’s last 15 minutes when a 6-7 point surge took the close to new highs. A noon hour probe of higher highs had already fallen back under Monday’s highs. The surge’s origin was too late to qualify as confirmation, so another near-term downleg is likely to begin within minutes of Wednesday’s open.

Downlegs produced by this setup range widely in duration and degree. More important than price reversing down is price not extending higher – the longer that price trades flat from here, the deeper the eventual drop. Probes of higher highs should fail to gain traction, serving only to further trap buyers.

Dropping immediately Wednesday could absorb selling pressure within hours, perhaps bottoming Thursday ahead of Friday morning’s Employment Situation report. Probing higher highs first, instead, would be appropriate for the pattern so long as each rally attempt were retraced back to and/or through its origin.

Notice how this setup’s influences don’t preclude the market from probing higher highs, and don’t require an immediate downturn. The setup requires only that buyers don’t gain any traction. Regardless, Tuesday’s too-late surge should be invalidated by Wednesday’s close for confirmation.

Indicators and Internals.
Simultaneously oversold RSIs at the 992′00 low before Tuesday’s open all but require a retest. This is added to Monday morning’s 988′75 low. Tuesday afternoon’s 997′00 low shared the same properties, but its retest was already neutralized just before the last-minute surge. RSIs diverged negatively into higher highs after the Globex open, underscoring the weakened buying pressure.

Wednesday’s opportunities.
Tuesday’s last trending was up and the afternoon’s 997′00 low printed prior to the last half-hour. So, gapping down Wednesday under 997′00 would signal a session-long decline. Otherwise, extending higher first would target 1009′00-1011′00, probably within the first 15 minutes of volatility, vulnerable to be reversed down soon after. Such volatility will have its catalysts: Two pieces of jobs data come pre-open during this Employment Situation week. Then two more econ reports are scheduled for 30 minutes after the open at 10:00.[/pay]