Market Wrap

[pay]Pattern notes.
Was last week the turn? Clearly, buyers have lost traction. But have sellers gained it? Last month’s Descending Triangle (defined in green) broke higher instead of lower, which we knew at the time to consider false. The breakout’s confirmation opportunity failed, and June’s first two weeks (defined in red) only ranged sideways.

The consolidation chipped away at May’s “lower prior highs” – only the lowest of those tests offered any support to last week’s break. I don’t consider those tests to be “higher prior lows” since they had a purpose (unlike May’s highs). So, I don’t consider Thursday and Friday’s highs as having chipped away at their resistance. That said, a gap above Friday’s high would be credible for extending higher.

This second chart addresses the possibility for extending higher. We knew sellers had lost traction since Wednesday’s close failed to break under Tuesday’s prior low (green circles) despite probing it intraday. The near-term bullish opinion didn’t mean buyers had regained control, and any gains would be thanks to weak sellers, not because of strong buyers. In fact, buyers failed two opportunities to gain traction from closing above Monday’s prior low (circled red) despite probing it intraday.

Having failed to retake control peaceably, buyers can gain traction only by force – by rejecting their weaker action with  a gap above Friday’s high.

The third chart shows why not immediately resolving the situation would be unlikely to resolve up or down before Monday’s close – if resolved Monday, at all. The rally from Wednesday’s low (red uptrending support) was broken Friday morning and held as resistance Friday afternoon (blue circles). A gap above the trendline would reject Friday’s break under it. Meanwhile, the interim low touched the trendline’s last test (dotted red line), requiring sellers to reject the reaction’s bounce by gapping down.

Essentially, sellers have upset the uptrend’s status quo by breaking it, but they’ve left a vacuum by touching the uptrend’s prior low without closing under it. The market doesn’t like vacuums. If sellers don’t exploit it the trendline break, then the market will suck in buyers to fill the void.

Indicators and Internals.
Friday afternoon’s session low narrowly avoided its most oversold 3-minute RSI by a single bar. But it was still oversold during the low’s formation, along with 1-minute RSI. That’s difficult to avoid retesting, and its retest would be difficult recovering. The market’s clearest path to breaking free from this lower magnetic attraction is to gap or spike up sharply Monday morning.

Monday’s opportunities.
Notice that the last chart only requires buyers to recover Friday afternoon’s high above 920’00. This is deceptive. Beware of such opening strength that also tests Friday morning’s 923’00 high. Holding its test through the opening sequence would trigger a repeat of Friday morning’s drop, but at a much fast pace. Friday’s lows around 911’00 might limit the day’s decline, but not necessarily the day if attacked early enough, and not the week if attacked at all.

This week’s events are substantial for their gravity more so than their quantity. The econ calendar includes an FOMC interest rate announcement, while the Fed and Bernanke each take center stage at separate hearings. If last week’s weakness was defensive posturing ahead of the events, a bounce up into Wednesday FOMC news would be likely. An interim bounce would not deprecate the damage already done to the chart since May’s highs – damage that is free to expand without any bounce, first. [/pay]

[pay]Pattern notes.
Wednesday’s tepid selling had opened the door to higher prices. Thursday’s buyers walked through it, grudgingly. A gap up above Wednesday’s highs could have ruled the day, but a weaker gap up was rebuffed into negative territory. Sellers weren’t biting. A surge quickly returned to Wednesday’s highs and then ranged there narrowly through the close.

The session’s price action offers no new clues, other than to confirm the template described in yesterday’s Trading Plan. Patient sellers stepped back into expiration, and their absence has given buyers a greater role in influencing price. The post-open ranging around prior highs is “ineffectual optimism” that is likely to resolve down, or else briefly probe higher highs.

Expiration influences are always a wild card, but this being a Friday, the morning’s bias is still likelier to persist through the noon hour. New sponsorship could appear in the session’s last 90 minutes.

Indicators and Internals.
RSIs reflected no buying or selling pressure of consequence Thursday. This inhibited afternoon volatility beyond the relatively narrow range already in place. It also helped to ensure that tests of support and resistance would hold. This complacency must end during Friday’s opening sequence, or else price action could continue to be inhibited into the afternoon.

Friday’s opportunities.
Thursday’s ranging already reflects pent-up buying and selling pressure. The most likely path for neutralizing each is to break higher, first. Each pressure can also be neutralized by gapping open – buying pressure can be neutralized by gapping down under the 905’00 prior low, and a gap above 924’00 would neutralize selling pressure. Attacking either would still be likely to reverse down.[/pay]

[pay]Pattern notes.
Wednesday’s price action represented two solid efforts to break from Tuesday afternoon’s trading range. There was the morning’s dive to 899’25, and then the afternoon’s climb up to 914’25. Yet, neither attempt gained traction, and the close was still in the process of testing Tuesday’s 906’50 low as support.

Shouldn’t this be de facto bearish since the close was negative, and since the rally was the most recent failed effort? It’s certainly not accumulation, and in that respect it isn’t bullish. But sellers had the optimal setup, i.e. chipping away at support, failed rally. At least the most recent failed effort was buyers making an effort. The most recent failure was sellers refusing to exploit an opportunity. No excuse.

When no signal is a signal, don’t lose sight that it was the market’s second choice. Price is the product of supply and demand. Strength from here would be due to less supply (fewer sellers), and not necessarily from increased demand (more buyers). We definitely want to know which way the wind is blowing, but we should know when it is only a breeze.

Indicators and Internals.
Technicals left no unfinished business Thursday. More so, the market resolved its divergences without much delay intraday.

Thursday’s opportunities.
Opening strength Thursday has room to test 911’50 or even 914’00 without buyers gaining traction, perhaps only refueling sellers. Gapping up above either would likely signal a session-long rally next targeting 921’00. Probing both but reversing back under 911’50 would put down sharply to resume the week’s decline by a relatively wide margin under Wednesday’s 899’25 low.

Perhaps the most bullish scenario would gap down several points (902’00?), probe Wednesday’s low, and recover through 10:15. It’s the same path that Wednesday followed, just too late to attract durable buying. The risk in opening weaker, of course, is in not recovering. And that’s a growing risk, given this week is expiration, and sellers have been the dominant influence.

Jobless Claims before the open tends to incite a reaction. But two econ reports are due at 10:00, timing that often tends either to accelerate or to reverse any trending already underway. Extending the decline through Thursday’s bias window might as well extend it into Friday afternoon. Extending it further into the weekend would point lower into Wednesday’s open.[/pay]

[pay]Pattern notes.
The selling through Monday’s open never regained traction intraday. A dip attacking 915’00 was recovered and never extended down. But sellers weren’t really pushed back – not intraday, and not overnight – not until the early hours before Tuesday’s open pushed up to nearly 925’00. The template predicted flat to lower price action through the morning, trading to and/or through 918’00, opening the door to aggressive afternoon sellers.

Similar to the late arrival of overnight buying pressure, sellers waited until late-morning before influencing price action. This forced their efforts into a compact window, producing a steep drop to the target area. This also forced the afternoon’s break under 918’00 to be steep – steeper, actually. And deeper, eventually touching 906’50.

Another bounce attacking 914’00 once again waited longer than normal before peaking, so the last 15 minutes plunged 7 points into the close. The entire false breakout fropm last month’s triangle (defined by green trendlines) has been retraced back to its first origin (yellow highlight). The interim consolidation (defined by red trendlines) need not be retested at all, ever.

The next trending should either retrace some of the past week’s drop, or else accelerate its pace. How does a vertical drop accelerate its pace. Not pleasantly. Remember the warning at Friday’s close: with no unfinished business above, and no untested support below, aggressive selling was likely. Once again there is no unfinished business above, and no untested support below.

“Higher prior lows” from the past two weeks were produced by testing earlier “lower prior highs” as support. This characteristic dilutes the attraction back to the higher levels. To the contrary, finally breaking through support tends to encourage more selling pressure than was expended. That principle won’t be pretty if the opportunity arises to apply it to a retest prior lows around 875’00.

Indicators and Internals.
Although 1-minute RSI became oversold at Tuesday’s last-minute low, 3-minute RSI only approached oversold levels, leaving plenty of room to deteriorate further.

Wednesday’s opportunities.
The econ calendar fairly active, and Bernanke speaks. The next lower targets were 903’00 and 900’00. Tuesday’s last-minute final drop might have rendered those levels moot – at least, regarding their ability to produce a bounce. Leaving the 900’s behind probably won’t find many bottom-fishers. A third day of lower lows at this stage of the pattern would attract sellers, not satisfy them. By the same token, almost any chance at a corrective bounce requires starting early, since further damage would risk reinforcing a downleg’s sponsorship.[/pay]

[pay]Pattern notes.
Monday’s last half-hour was similar to Friday’s, in one interesting respect: the misplaced optimism. Recall that Friday’s last bounce originated too late to be credible, neutralized any attraction back to prior highs, and left no intraday support below. If buyers weren’t dominating Monday’s open by gapping up above 946’00, then the open was likely gapping down under Friday’s ~931’00 low .

The overnight drop and the morning decline lost its sponsorship at the 918’00 objective, much the same way that Friday morning’s sellers lost their momentum. The balance of each session largely ranged sideways, firming into their respective closings. There was no accumulation to produce either bounce.

Friday’s bounce came from testing intraday “lower prior highs” around 937’00-938’00. Having neutralized that support, Monday’s open could easily gap down. Monday’s bounce came from testing June 3’s prior lows around 918’00. This prior low was itself a retest of a “lower prior high.” That’s hardly support, so Monday’s bounce was only obligatory, and not accumulative. Tuesday’s open can easily gap down.

An overnight bounce has room up to 925’00-926’00 without buyers gaining traction. Any higher through any relevant timing window would next probe Friday’s “higher prior lows” around 934’00. But the optimal resolution is a gap down Tuesday under Monday’s 915’50 lows that resumes Monday’s decline.

Indicators and Internals.
RSIs diverged positively repeatedly Sunday night, helping to confirm the 918’00 objective. Positive divergences into the cash session’s low found traction for the late bounce, so there is no unfinished business below. Regardless of whether Monday’s decline resumes, Monday’s lows should be retested as support if only for sellers to be trapped below.

Tuesday’s opportunities.
Sellers aren’t required to immediately retake control Tuesday. I would be suspicious of any attempt to resume the deline that wasn’t preceded by a bounce, whether overnight or at the open. But any bounce must be sizable for buyers to gain any traction, instead of likely resolving down through the morning. If sellers continue to guide intraday price action Tuesday, their influence should continue to damage the rally’s chart.[/pay]