Market Wrap

[pay]Pattern notes.
Friday afternoon’s price action may have seemed relatively benign. Its range wasn’t very narrow, 6 points either way of Thursday’s close. But the afternoon’s range was narrow relative to the Employment report’s reaction, and to its rejection through the cash session’s open. Perhaps most decepective of all was the close being nearly unchanged.

The relevance of these normal characteristics is defined by the what the open attempted, and failed. Its surge made new trend highs intraday (highlighted pink) and yet closed back under the trend’s high close (circled green). This is the basis for a “Gotcha!” setup, which points down immediately the following day.

One of the Gotcha’s two other elements is the origin from under prior highs (circled red). The final requirement is to close back under the trend’s 943’00 high close (still circled green). The Gotcha setup is already influential before the close, so there was a lot of selling pressure available. And after such a big rejection that morning, the afternoon had every right to extend down. But sellers were patient, leaving that selling pressure on the table to attract price down Monday.

The failed test of prior highs formed the basis of Gotcha’s setup. A recovery above prior highs would form Gotcha’s failure. Otherwise, a retest of 930’00 should offer little support on the way down to 917’00. Below there on a closing basis would just be a matter of time and of timing before extending lower. The breakout from May’s Descending Triangle is vulnerable to reversing down sharply if buyers lose traction, and sellers gaining traction is just a formality.

The pattern’s middle leg (first leg not shown on the next chart) was already tested as support after June’s breakout attempt. Its retest would offer less support, if any, and the 917’00 target would break under it. The Descending Triangle’s reversal would next target the pattern’s 880’00 area low.

Indicators and Internals.
Technicals improved into the afternoon’s lower lows, and their positive divergence produced an 8-point bounce into the closing position-squaring. That bounce peaked at 943’00 whose recovery would have invalidated the Gotcha setup. But there is no unfinished business from technicals.

Monday’s opportunities.
Gotcha’s most important effect is its immediate follow-through. So, not gapping down or otherwise breaking sharply lower Monday would raise a red flag as to whether the setup had fully formed. Friday’s pre-open surge on the Employment Report doesn’t require a retest, but it would be a likely objective if sellers aren’t retaking control.[/pay]

[pay]Pattern notes.
It’s all over, but the waiting. The last two hours’ narrow range was appropriate for pre-report anxiousness. The hovering at session highs without making any gains was appropriate for weak handed buyers. This doesn’t preclude Friday’s reaction to the Employment Report from gapping up, and it doesn’t preclude the reaction from extending higher. It’s just the less likely path.

Having ended the day pushing on Tuesday’s higher prior lows, the less likely bullish path would gap up above Tuesday’s highs. The trick for a rally to extend would be to extend the rally from there. This being a Friday, the open’s bias is likely to persist through the noon hour into early afternoon. Whoever gains traction from the open could dictate next week’s action.

Indicators and Internals.
Technicals either diverged negatively or simply did not confirm the last-minute tick up to a new session high. The comparison wasn’t extended to begin with, and the retest’s timing wasn’t going to prevent higher highs. Nevertheless, a new rally leg would require gapping up to overcome the inertia of Thursday’s close.

Friday’s opportunities.
The big news is May’s Employment Situation report. The fireworks is largely played out pre-open, but trending and reversals are still entirely possible when the retail crowd gets involved… Reminder: I will be available Friday until 11:00am ET, and then again if market conditions require. [/pay]

[pay]Pattern notes.
Wednesday’s drop through the noon hour didn’t try to resume the decline until the session’s last half-hour. Its 2-tick probe under the 923’00 prior low lasted less than a minute. Five minutes later the 924’25 bounce limit was recovered. Another twenty minutes later the recovery was 10 points, and thoroughly probing 930’00-932’00 resistance.

This area attracted price up to it in Monday’s gap up, and attracted price down to it as Wednesday’s bias-down target. The area’s third visit stopped short of rejecting all the price action below it, which means its sellers do not represent pent-up buying pressure. A break maintained under 927’75 would start to signal the bounce had ended, and extending down under 925’00 would confirm momentum had reversed down to resume the decline.

Price hovered optimistically for two hours of ranging before the late surge. Optimistically, because price refused to dip another couple of points where the gaps back to Friday’s close could have been filled. The momentary 2-tick dip that preceded the late surge certainly didn’t trap sellers. And the late surge that followed neutralized any oversold condition, which might have otherwise forced the buying into Thursday’s open to extend higher.

Thursday’s open might yet try to duplicate Monday’s effort, and immediately extend the prior day’s closing surge. Monday’s effort found this optimism to be unsustainable, and so would a repeat effort Thursday. That said, the 938’00-939’00 area could be probed first, perhaps even Tuesday’s 943’00 close. But buyers don’t regain control without closing back above 939’50 – and then possibly only to probe higher highs up to 950’50.

Indicators and Internals.
RSI did not diverge positively at any time during the formation of Wednesday’s low. MACD deteriorated into negative territory to confirm the late 2-tick dip. The late surge’s slope already gave away its sponsorship’s identity as being weak hands. No other type of buyer is attracted when technicals and timing are both lacking. RSIs diverged negatively after the late surge’s peak, a little too late to be predictive, but appropriate nonetheless.

Thursday’s opportunities.
Jobless Claims will highlight the day’s econ reports. The metric differs from the Employment Situation report, but any surprise is sure to shake things up in case of a surprise Friday.  Bernanke is scheduled to speak 15 minutes later… Reminder: I will be away from the market and not updating Friday after 11:00am (I’ll return in case of unusual developments).[/pay]

[pay]Pattern notes.
A breakout is only a breakout until it is confirmed. Only then is it a trend. Confirmation Tuesday would have been surprising, since Monday’s breakout was already built on sand. Friday’s first breakout attempt failed to hold above the prior highs it had probed. And Monday’s breakout was optimistically early, and failed to extend several intraday probes higher.

Tuesday’s opening sequence quickly resolved the retest of Monday’s high. Notice the pattern of impatient buyers quickly losing steam? The morning’s high never improved, and an afternoon rally attempt also fizzled. Not surprisingly, the session ended well towards the lower-end of its range.

Buyers didn’t accomplish anything, but neither did sellers. Similar to Monday’s close holding above relevant lows, Tuesday’s close also held above any sell signal. Both sessions ended in decline, and not from increased buying. But other than failing to confirm a breakout – which is not at all bullish for this stage of the pattern – there was no damage to the chart. Not, yet.

Indicators and Internals.
Technicals didn’t reflect much commitment Tuesday afternoon. There was certainly non-confirmation into the highs that proved accurate. But that was just less buying pressure, not divergence. Sellers didn’t break a sweat when falling into the close, although the difference from buyers is that technicals did deteriorate further as price continued to drop.

Wednesday’s opportunities.
A drop has 11-13 points of room down to 930’00-932’00 before sellers gain traction that could reverse the trend down. That’s a lot of selling energy to expend, and then be expected to break support. Any credible selling effort would begin by gapping down sharply, or else after bouncing first. Otherwise, intraday probing of higher highs is possible, perhaps to test the 950’50 area. Gapping up above Tuesday’s 947’75 highs would trigger a session-long uptrend – possibly more of the session-long than of the uptrend. Anything that further delays a pullback would make its inevitable arrival more harmful.[/pay]

[pay]Pattern notes.
Monday’s opening surge started from above Friday’s high. A breakout needed only to close above Friday’s high, so the expedited schedule reflected impatience. This impatience tainted every subsequent probe of higher highs. In fact, the session’s very last move was a dip back down to post-open lows at 939’50 (highlighted pink on the nearby chart).

Price has since dipped another 2 points into the evening, but that won’t be relevant unless it leads to gapping down under a prior high or prior low. Much more relevant otherwise is that a prior low held on a closing basis. That maintains the potential up to 950’50 (+/- 1 point), put into play by Monday’s breakout.

The 950’50 target area is the product of a multi-week Descending Triangle that broke higher Friday, but stopped short of signaling a breakout. The late surge’s high probed all prior highs and also closed back under them. Monday’s alleged breakout might yet prove valid if confirmed Tuesday, by closing above Monday’s 947’25 high. Stopping short wouldn’t mean momentum was reversing down, not yet. But intraday probes of higher highs would be expected to fail.

The resolution is normally brief after breaking  upward from a Descending Triangle. It is not a continuation pattern. “The bigger they are, the harder they fall,” doesn’t always apply in charting – but it does apply here. So long as pullbacks hold prior lows, Monday’s high will be probed.

Indicators and Internals.
3-minute RSI was at its highest overbought when Monday afternoon’s high printed. Its retest is likely, especially so long as pullbacks hold prior lows. The retest might be brief, since technicals on other time frames already started deteriorating before Monday’s high.

Tuesday’s opportunities.
The overnight dip has room down to 935’00-936’00 before breaking free from the orbit around Monday’s highs. But there is still substantial support at Monday’s 930’00-932’00 open. This area can bend, but would be difficult to break intraday, after the open and before the close. The rally can tolerate intraday weakness, but not a close under support. And until then, there remains potential to retest of Monday’s 947’25 high up to the 950’50 area.[/pay]