Market Wrap

[pay]Pattern notes.
What we do know about the market after Monday’s close is what we did know about it after Friday. What we don’t know is even more interesting: We don’t know whether the three-week rally has ended, but we know Friday’s last-minute surge was false. We don’t know whether Monday’s pre-open high will be retested before a downleg appears, but we know Monday’s close was within its orbit. And we don’t know if a downleg will appear at all, but we know there’s now less support to challenge it.

– If Friday’s last-minute surge to 979’00 were a valid breakout above the session’s range, then it would have been valid confirmation of Thursday’s breakout. Despite Monday’s 984’00 pre-open higher high, the close was a recovery from the morning’s drop. That’s not the stuff of a valid breakout.

– Monday’s 984’00 pre-open higher high is a “new Globex trend extreme” which requires a retest intraday. Its retest isn’t required before a downleg begins, but it’s helpful. It’s usually retested first, when the prior low remains unbroken – in this case, Thursday night’s ~963’00.

– Thursday night’s ~963’00 low already had its support chipped away Friday morning. It’s not likely to offer much support if tested. Friday’s noon hour ranging was the only interim support, and its support was neutralized by testing Monday morning at 969’50. If a downleg were to appear, it could easily be almost a straight drop down to last week’s “lower prior highs” at 954’50.

Monday’s gap down and session-long ranging in negative territory was “ineffectual pessimism.” Appearing in a downtrend, this setup would almost surely identify a bottom forming. Appearing in an uptrend off the highs is more a reflection of weakening buying pressure. The burden of proof Monday was on buyers, and they didn’t offer any evidence. Buyers didn’t prevent sellers from extending down – sellers prevented buyers from extending up.

If this rally is going to resume, then it needs new sponsorship. New sponsorship would be evident by the slope steepening. That would be entirely appropriate for the Rubber Band setup now ending. So, while not extending higher at a steeper slope would have meant the Rubber Band was likely to snap down, it now also means the weakening rally wasn’t being rescued by new sponsorship.

Indicators and Internals.
RSIs were deceptive into Monday afternoon’s rally. The 3-minute peaked just before probing oversold, so it was never extended. The 1-minute diverged negatively, but not until after the cash session close, so it doesn’t require a pullback. But neither is very supportive of higher highs, or of higher highs being durable.

Tuesday’s opportunities.
An early retest of Monday’s pre-open 984’00 high would be extra vulnerable to reversing down. Not reversing down from this liberated situation would leave a void, and leave the market to suck in buyers. An overnight test and rejection of 984’00 would serve by proxy as a retest of the “Globex trend extreme,” neutralizing its magnetic attraction. A rally all but depends upon extending higher without delay at an accelerated pace. Missing on any one or two of these elements could find a new direction underway.[/pay]

[pay]Pattern notes.
Friday’s session offered a great example of sponsorship, and the lack thereof. Of the three main lessons, the middle one chronologically had the most relevance. This was the extended narrow consolidation at Thursday night’s lows.

Extended narrow consolidations aren’t very rare. Among so many such setups there is a great likelihood that the first trending attempt will fail. The narrower consolidations have more density, and extended consolidations have more mass. The two characteristics combined create greater gravitational pull. Indeed, the more likely for trending attempts to fail repeatedly.

Repeated attempts to trend away from Thursday night’s consolidation (circled black) each retraced back into the consolidation to varying degrees (highlighted green). Sellers never had enough sponsorship to break through the consolidation Friday morning. New sponsorship is most difficult to attract on Fridays, which is why a trading range was the expected alternative to not breaking lower early enough.

Thursday evening’s sellers also lacked sponsorship for extending the initial drop either. This was chronologically the first example. Thursday’s late-afternoon pattern had already predicted – regardless of whether price reacted up or down – to expect a rally off of the post-close earnings reaction. Two factors made a rally likelier to have greater sponsorship following the afternoon’s relatively narrow top (circled green). First, because sellers acted too late to exploit buyers’ hesitation. Second, because that action was too dramatic relative to the top’s narrow range.

Notice how this reflection of excess pessimism didn’t stop a negative reaction, it only doomed that reaction to being retraced. In fact, the overnight parameter was back above 966’25 would target “higher prior lows” at 971’00. The delayed reaction didn’t change the target, it only exacerbated the target’s test. The top’s 38.2% retracement was met nearly 3 points above 971’00.

Which segues into the third example of sponsorship, or lack thereof. Without a sell-off underway early, the trading range was on-track to persist through the close. A session’s most malleable timing window is its closing minutes, most of all on Fridays. Some setups harness this unpredictability into predictability. The afternoon’s two-hour consolidation made price action into the close unlikely to remain in the narrow range. If the trading range’s influence wouldn’t push price back down, then the market would suck in buyers to fill the void. Sellers lacked sponsorship, and prices surged.

Bigger Picture Update
Last week’s extension of the rally has put into play the “Rubber Band” setup. Closing prices have risen with only 1-2 exceptions among ten consecutive sessions. Picture a rubber band being stretched to its breaking point, and then being stretched more. The force being applied to perform the stretching doesn’t change, but it suddenly becomes more productive, unencumbered by the rubber band’s resistance.

If Monday’s session doesn’t surge impressively, then it’s probably because the rubber band’s integrity has been maintained. In this case, it could be obvious Monday or Tuesday that the rubber band is catapulting the rally’s force back to its origin and lower. This is the setup’s likelier resolution in an uptrend, with the caveat that resolving up tends to resolve very up, very quickly.

Thanks to Friday morning’s repeated chipping away at support, the 963’00-965’00 area shouldn’t offer much support if tested again. Thursday morning’s 949’00 low would be targeted next, which was itself a retest and also unlikely to offer much support if retested again. This would turn Thursday’s breakout attempt into pure ballast, already having failed to be confirmed Friday (stalling new highs until the last 15 minutes is too late).

The rally may be living on borrowed time. But it can still spend that loan wisely by extending higher early and often on Monday or Tuesday. A mild pullback on one of those days or the other could be absorbed. If sellers aren’t clearly retaking control by Wednesday’s open, then price should already be substantially higher than at last week’s close.

Indicators and Internals.
RSIs were last oversold at Friday morning’s second to last low (the 964’00 pivotal low). Sellers haven’t been much of a factor since then, while buyers took both 1-minute and 3-minute RSIs to overbought both into and out of the cash session close. Friday’s last 15 minutes are the most malleable, and unable to offer confirmation of a prior day’s breakout, so their overbought readings don’t require a retest.

Monday’s opportunities.
The Friday Factor setup can provide interesting guidance when its first and last 15 minutes trend in the same direction. Often Monday’s first 15 minutes will perform similarly from the opening tick. Notice this doesn’t mean Monday’s open will gain, only that it is likely to gain briefly from the opening tick, whether gapping up or down. Considering the Bigger Picture’s “Rubber Band” context, I would be inclined to buy a gap up, and to slowly short a gap down.

A gap down that bounces back up to Friday’s 979’00 close should then either sell-off sharply, or else surge higher. The biggest sell signal wouldn’t be generated much above 973’00. That’s where Friday’s last two hours created another mass whose gravitational pull will be influential if its orbit is re-entered. New Home Sales 10:00 will keep alive its potential retest regardless of the opening ticks.[/pay]

[pay]Pattern notes.
It’s not necessarily distributive if probes of higher highs don’t immediately extend higher. It’s just not helpful if those probes haven’t extended higher when timing windows lapse. That was the case with Thursday afternoon’s narrow upward slant.

The morning’s surge gave buyers every excuse to be expended, or for sellers to be marginalized. A probe of 976’00 soon after the noon hour was hampered by the afternoon’s no-bias environment. This bias had lapsed when Thursday’s last hour retested 976’00. Yet, despite no bias constraints, the retest of 976’00 still didn’t break higher. The rally’s only justification for running in place would have been that its buyers were being patient. That excuse dissolved when the noon hour’s low was retested into the close.

None of which meant that sellers had retaken control. A positive reaction to post-close earnings from AXP, AMZN, MSFT would have trapped Thursday’s late sellers to jump-start the morning’s rally. The actual gap down to 963’50 still doesn’t give sellers traction. Meanwhile, buyers have lost traction, and they don’t regain it without closing above 975’00.

Indicators and Internals.
Technicals deteriorated into the afternoon’s highs, leaving no unfinished business above. The first hour of post-close trading has already seen deeply oversold RSIs start to improve. A corrective bounce not underway into the evening could require a much deeper dip, first.

Friday’s opportunities.
Back above 966’25 would target “higher prior lows” at 971’00. Probing under 962’25 while RSI deteriorates could find Friday’s open back at Thursday morning’s 953’00 buy signal. These parameters can be influential overnight. The post-close reaction doesn’t necessarily invalidate Thursday morning’s rally. Probing 971’00 as resistance but closing back under it would equate to being a sell signal. Intraday strength that tests 981’00 and reverses down to close under 971’00 would equate to several sell signals. [/pay]

[pay]Pattern notes.
Yesterday’s comments in this space described why the last hour of Tuesday afternoon’s recovery couldn’t confirm Monday’s breakout attempt. Wednesday’s session traded largely within Tuesday’s last-hour range. If that wasn’t good enough for a breakout Tuesday, it certainly didn’t qualify Wednesday. The burden of proof was on buyers to confirm, and they didn’t.

Having squandered the opportunity, buyers would have been more productive by letting sellers trap themselves short with lower lows. Instead, buyers expended their energy trying to hover at recent highs. To a degree this is bearish, without actually being a sell signal.

Wednesday afternoon’s lows held 948’50 as support, whose test did nothing relevant into the close. Holding 948’25 as support Tuesday didn’t help buyers Wednesday, and it probably didn’t help them for Thursday. The only most bullish factor is simply non-bearish, in that once again sellers failed to close under a prior low.

The 943’50 pre-open low is still likely to be retested. If not recovered, then the break maintained under 945’50 would put back into play 933’00 and then lower. Rallying without first testing 943’50 could extend, but it would not be as clean.

Indicators and Internals.
Wednesday afternoon’s low narrowly avoided both the deepest oversold 3-minute RSI, and simultaneously oversold 1-minute and 3-minute RSIs at the low. Not that this produced any sort of bounce, since the last hour remained glued to the 948’50 area. Retesting Wednesday afternoon’s low without being required would mean durable sponsorship had probably arrived. Any dip under 948’50 that doesn’t recover through the open will likely have extended down multiple points already.

Thursday’s opportunities.
A close under 948’50 would have made Thursday’s open likely to gap down under 945’50, and extend down. An early break under 945’50 Thursday would still be likely to trend down. There’s no requirement to gap or to trend in either direction. But a gap above 954’50 would be likely to trend up throughout the day. Jobless Claims is pre-open, and Existing Home Sales is 30 minutes after the open. Meanhile, the earnings deluge continues.[/pay]

[pay]Pattern notes.
Did it, or didn’t it? Monday’s breakout attempt relied upon Tuesday’s session for confirmation. The open’s gap up was swallowed whole, and the recovery didn’t turn positive until the session’s last half-hour. A majority of Tuesday’s range was under Monday’s 948’50 highs, which isn’t quite the spirit of confirmation.

Additionally, S&Ps peaked upon testing the afternoon’s 952’75 bias-up target. Although the bias-up signal never triggered, its target is valid resistance. The afternoon’s rally began during a no-bias environment, typically a counter-trend time to expend buying pressure. And that buying pressure was satisfied.

If not for the afternoon’s rally, there might have been pent-up buying pressure awaiting Wednesday’s open. Once again, all unfinished business is under the market, not above it. The morning’s rejection of both bias-up parameters had put into play 933’00, which is still an objective, but not currently in-play. As for resuming the rally, early strength won’t be any more reliable Wednesday than it was Tuesday. And it’s not enough to simply close positive.

Indicators and Internals.
RSIs did not reflect substantial aggressive through the last hour of Tuesday afternoon’s rally. The reaction to AAPL’s earnings actually caused 3-minute RSI to diverge negatively. It’s not enough to signal a reversal down, but it would undermine the stability of a higher high.

Wednesday’s opportunities.
The reaction to AAPL’s earnings has come within 1 point of Tuesday’s 956’25 pre-open high. This doesn’t require a retest, but retesting and rejecting its test overnight would be free to decline. Any break maintained under Monday morning’s 945’50 high would signal momentum already reversed down – whether at Wednesday’s open, entering the noon hour, or at the close. A higher close won’t mean much if it was the lower-end of a mostly higher day. And while trending isn’t indicated one way or the other, volatility is likely with Bernanke testifying again and earning still coming.[/pay]