Market Wrap

[pay]Pattern notes.
LThe trading range character of Friday’s expiration session did persist well past Monday’s noon hour. In fact, the open’s 942’25 was still being touched as support until the last hour. That’s when the market sucked in buyers to fill the void left open by sellers. They had stopped the open’s gap up from extending higher, but never exploited it.

Except for actually breaking under a prior low, sellers did everything they could have done, and buyers absorbed it all. Almost everything. The morning’s dip down to 937’25 stopped 1 tick short of its objective, which should have been probed. Impatient buyers prevented that, but those buyers have been more productive than sellers. The afternoon’s 948’50 bias-up target was touched within 1 tick.

Buying pressure was essentially satisfied, despite the signal not having triggered. New highs are never a sell signal, and Monday’s breakout attempt would be confirmed by a second consecutive higher close Tuesday. New highs aren’t always a buy signal, either. Since the morning’s highs weren’t broken until the last hour, the breakout would be rejected by a gap down that fails to recover quickly.

Confirmation never came the last time this area was tested seven weeks ago. But the break above 926’00-928’25 isn’t likely to be recaptured near Tuesday’s open without a big tumble overnight. That would take significant weight off of buyers, but more important at this stage is whetherMonay’s new relative highs are confirmed.

Indicators and Internals.
Monday afternoon’s negative divergences into closing highs was undermined by the contrary timing, coming during position-squaring. But the afternoon lows at 940’00 were not technically sound as 3-minute RSI made lower lows despite 1-minute diverging positively. Sunday night’s last relative low had technical difficulties that made its retest likely, and its retest was essentially fulfilled. A second such piece of unfinished business below could gain traction.

Tuesday’s opportunities.
Bernanke’s House testimony will be an attraction and a distraction. Retail sales data and the 1:00 Treasury auction results may be more impactful to price action. Trending up early enough and holding up long enough would put the 940‘s behind us, possibly for some time. That might be the only path higher, since Monday morning’s dip was recovered, so another morning dip would be less likely without much stronger sponsorship.[/pay]

[pay]Pattern notes.
Monday’s analysis is Friday’s analysis. Buyers are stretched thinly from Thursday afternoon’s simultaneous break above June 30/July 1’s pivotal and actual highs (outlined in green and red on the chart). Refer back to Friday’s Trading Plan for more on this, if needed. Higher highs above 926’00-928’25 (circled in orange) weren’t rejected Friday, perhaps for the same reason they were produced, at all – option expiration influences.

Since trending wasn’t signaled early Friday, it wasn’t likely to be signaled at all, being an expiration session. And being an expiration session, Friday’s characteristics are likely either to be similar into Monday afternoon, or else diametrically opposite. So, Monday’s session should either duplicate Friday’s sideways ranging, or else trend madly. Regardless, expiration’s influences should become irrelevant by Monday’s last 90 minutes.

The bigger picture.
If expiration’s influence was responsible both for pushing and suspending S&Ps above prior highs, it may as well have been the cause of last week’s unchecked surge. As long as we’re on the topic, why not blame it also for the prior week’s decline.

Actually, expiration may be more responsible for stopping the prior week’s decline, and less so for retracing it. Despite its slope and its size, the surge has only tested July 1’s prior high. Thursday afternoon’s breakout attempt wasn’t confirmed by a higher close Friday. A higher close Monday would still require confirmation Tuesday.

If that sounds familiar, it’s because this same problem afflicted June 1’s breakout attempt above 942’25 (horizontal red dashed line on the chart). Maybe the five-week drop down to 866’00 took only one week to be undone. Holding up above 926’00-928’25 much past Tuesday’s open would suggest a different outcome to the next test of 942’25 – whether the rally were to extend this week, or dip first to “lower prior highs” (LPH on the chart) around 902’00.

Rallying out of this three-month range would be signaled on a close above 947’50. If that’s not rejected from 958’50 (+/- 2 points), then 981’00 and 1015’00 would be targeted. Regardless of the eventual target, the move would be sponsored by speculative weak hands. So, any higher highs should mirror last week’s slope. An immediate drop Monday could still recover to resume the rally, but the bigger picture must still answer one important question: Whether last week’s noise was sellers refueling, or buyers just getting warmed up.

Indicators and Internals.
Friday’s last relative lows printed during the last half-hour. RSIs were simultaneously oversold during the low. A last half-hour print is not very reliable, and downright misleading on a Friday, let alone during expiration. That is, Friday afternoon’s low doesn’t necessarily require being retested Monday, but a lot of selling accompanied it. RSIs were overbought at the afternoon’s high, but had already started deteriorating. Although neither setup is predictive in its own right, it does make a reversal likelier from testing one end of Friday afternoon’s range.

Monday’s opportunities.
Gapping open either above last week’s ~941’00 high or under 931’00-932’00 would be likely to extend 4-6 points in that direction before correcting. That is, if the gap’s sponsorship is credible. Testing either end of the range less forcefully would more likely be overwhelmed by the attraction back into Friday’s range. Repeating Friday’s sideways ranging Monday probably won’t be as narrow, so probably worth waiting for one end of the range or the other to be tested. [/pay]

[pay]Pattern notes.
Is it expiration’s influence? Is Health Care reform about to be pronounced DOA? Is it a perfect storm of news items since last week’s 966’00 target was met? Must anything be behind this week’s unchecked optimism?

Wednesday’s simultaneous test of June 30 and July 1 pivotal and actual highs at 926’00-928’25 formed a setup that tends to resolve down. Sponsorship that produces such an extreme is excessively aggressive, where durable sponsorship would have inserted a corrective pullback between the two.

In this context, Thursday morning’s failed probe(s) above Wednesday’s highs were appropriate. But as has been the case all week, sellers were never offered a dip to gain traction. A void was created when the surge’s sponsorship peaked, and sellers weren’t exploiting it, so the market sucked in buyers to fill the void.

A 12-point surge eventually appeared, and soon extended to 15 points at almost 941’00. It originated appropriately at the lower-end of 926’00-928’25. And it originated appropriately at 1:30, after the market ranged sideways through the noon hour. And it would be rejected appropriately by gapping down Friday under Thursday afternoon’s 926’00 last relative low. This could put the expiration session into decline, perhaps the only chance sellers have for regaining traction before Monday afternoon.

Otherwise, Thursday’s late surge opened up a lot of room to absorb a more modest pullback without breaking under 928’25 “lower prior highs,” let alone under 926’00 prior lows. S&Ps reacted negatively to GOOG’s own negative reaction and IBM’s positive reaction, currently testing 934’25. That’s 1 point short of even signaling a test of 928’25, whose test is more likely to bounce than to break under 926’00.

Indicators and Internals.
3-minute RSI was pegged in overbought territory throughout most of its late surge to 938’00. After finally dipping from overbought, the next high’s peak were terminal. There is no requirement to retest these highs. Meanwhile, 1-minute RSI attacked oversold territory in the post-close dip, but an hour of deteriorating price hasn’t seen RSI worsen. So it is premature to consider that sellers may be retaking control.

Friday’s opportunities.
BAC, C, and GE are among the highest-profile earnings announcements on the calendar. Housing Starts are due at 8:30. If all this ammo can’t shoot down S&Ps to sustain a break under 926’00-928’25, then the balance of the session should trade flat to higher. Probably more flat than higher, temporarily probing Thursday’s highs up to the 942’00 area. Any other day might still be able to break the range late in the day, but that’s less likely on expiration days. An early break beyond the 926’00-942’25 range is perhaps the only trending opportunity before Monday afternoon.[/pay]

[pay]Pattern notes.
Wednesday was the third consecutive session of unchecked optimism. Except for a pre-open dip whose recovery triggered a buy signal at 911’00,  no other pullback created long-entry parameters. The morning’s bias-up signal did trigger. But only the noon hour’s consolidation flirted with a buy signal whose eventual break reached 930’75.

The last hour’s high was 2 ticks above the afternoon’s bias-up target, reflecting satisfied buying pressure. It also tested June 30’s 926’25 pivotal high (circled green), which is the high prior to July 1’s 928’25 actual high (circled red). That’s a lot of buying pressure.

The decline can’t resume until a prior low is broken as support. This defining line rises along with the market, lowered only occasionally. In this environment, pullbacks are likely to recover, although resistance is required to break.

An alternative to breaking under a prior low is to reject a single upleg. Thursday’s open has that opportunity if it gaps down under 924’00 into Wednesday’s noon hour range. That’s no so much unlikely as it is rare, and any shallower opening dip would be likely to recover for a probe of Wednesday’s highs.

Meanwhile, a fourth consecutive session of unchecked optimism isn’t likely, so opening strength would be vulnerable to forming at least a near-term peak. Such a peak might prove to be more durable, depending upon how much Friday’s expiration session proved it had influenced this week’s rally. More optimism throughout Thursday could extend higher through Monday’s open, or at least prevent sellers from gaining traction through then.

Indicators and Internals.
RSIs diverged negatively several times intraday, of course never retracing back under a prior low. I hesitate to classify the series as indicating bigger buying coming down the pipeline since it started so late. Most of the session’s gain had already transpired, so the ignored distribution was the bigger buying pressure.

Thursday’s opportunities.
High-profile earnings announcements before the open include IBM, JPM and GOOG. It’s not important what they are, or whether they beat estimates (whisper, or otherwise). My focus is on how the market reacts – not just intraday, but intraday relative to the close. Jobless Claims is also pre-open, and the Philly Fed Survey at 10:00. [/pay]

[pay]Pattern notes.
Monday’s optimism wasn’t so obvious Tuesday. I’m not even sure it was present, at all, or if sellers simply didn’t push back. The morning’s dip was only so productive as to probe overnight lows – and that is productive. The dip ended 3 points short of its target, with the morning’s no-bias environment pre-disposed to ranging sideways.

That was the third consecutive no-bias, and now there are four. The series’ first no-bias Monday morning was shaken off in favor of a no-bias rally. And the latest no-bias was followed by Tuesday’s 12-point gain in reaction to INTC’s post-close earnings announcement. The rally is stretching its rubber band thinly by extending higher without any refueling. Surging, spiking or gapping from a standing-stop is rarely appropriate, and the gains it produces may be steep, but not durable.

S&Ps have already printed 912’75, within striking distance of the gap back to July 1’s 919’25 close (circled green). This gap does not require being filled because July 2’s open gapped under June 30’s prior low (circled red). Back under 908’00 would confirm the test had held as resistance. The next resistance is above the gap at 922’00-924’00 (highlighted green).

Friday’s expiration may be influencing price higher. It’s help will be needed for pushing to and through 922’00-924’00. That, or an actual pullback to refuel buyers. Otherwise, excessive optimism this close to expiration can find the influence comes back to bite it in a very big way.

Indicators and Internals.
The post-close reaction to INTC’s earnings took indicators well into overbought territory, rendering them useless until past midnight. The cash session left no business unfinished.

Wednesday’s opportunities.
Overnight gaps up are rare, too rare to have predictable resolutions, other than to be proof of the optimistic undertones. Earnings aren’t as much a factor until the afternoon, in anticipation of Thursday’s pre-open deluge from the likes of JPM, IBM and GOOG (which I erroneously listed earlier as coming Wednesday). But the econ calendar is unusually steadily active throughout the morning, and into the afternoon’s FOMC Minutes.[/pay]