Market Wrap

[pay]Pattern notes.
15 points in 7 minutes. Just 30 minutes earlier, Friday’s close had potential for resolving in a steep spike down. A short-squeeze could have been triggered if 910’00 were recovered by 3:30. But it was already 10 minutes past that, and position-squaring was becoming dominant. Its influence began lapsing at 5-7 minutes before the cash session close, while price firmed to 913’00. The highest bar several minutes later nearly touched 928’00.

Those last minutes could have easily spiked down 15 points. Any move at that window would have been steep, making the risk untenable. Unless, of course, a move to that degree were expected. 15 points in 7 minutes.

The late timing window may not predict the move, but it informs us of the move’s sponsorship. Had a breakout of any degree begun just several minutes earlier, its buyers would have still qualified as bigger monied participants, i.e. “strong hands.” The move’s actual origin before 3:00 was a trendline test, which stopped optimistically 1 tick short of touching the range’s low. The entire bounce back to the range’s upper-end was disqualified from being accumulation.

The late timing window also qualifies the breakout. Perhaps the position-squaring influence had waned, but the surge did not extend an ongoing move. Its breakout was fresh, and too late to qualify as durable. This was not the product of buyers being rewarded for absorbing sellers, not even for working through resistance. The gain was leveraged by a lack of opposition. Not just “more buyers than sellers,” but suddenly more buyers.

Optimism was finally excessive at the surge’s peak. The E-mini ES exceeded the SP by nearly 3 points, depicted in the above chart by the blue bar and red line, respectively. The retail crowd was more optimistic than institutional buyers. This isn’t unusual, but the spread is. And from a contrarian perspective it identifies an unsustainable emotional extreme.

The Bigger Picture doesn’t change much. But it does change. The second chart’s multi-week Descending Triangle has been chipping away at support around 800’00. We discussed last week that any triangle could break either way initially, and also that breaking higher from a Descending Triangle tends to be false, retraced entirely, and reversed more substantially in the opposite direction.

Last week’s market also presented several opportunities to discuss a pattern’s “key” high or low. It’s the second touch of any slanted trendline, and there’s no trendline without it. Its break can confirm a trendline break. Or, not. Friday’s breakout attempt may be the latter. The late surge’s peak (circled green) tested prior highs – all prior intraday highs – but the close (boxed in orange) did not recover the pattern’s key high.

The breakout was not confirmed, and buyers expended their energy without gaining traction. This is one step away from a sell signal, but it is not a sell signal. Buyers can regain traction by extending higher Monday more productively. Having failed the test of one resistance, a durable breakout would require closing above the next prior high. This probe failed two tests of resistance, so a new high close is the only valid breakout signal.

Indicators and Internals.
Both 1-minute and 3-minute RSIs were oversold while Friday afternoon’s last low formed. Selling that is so productive doesn’t tend to attract durable buyers. Any product from that situation normally retraces. RSIs also made lower highs just before the last-minute surge. Again, this is not a stable base to launch a breakout.

Monday’s opportunities.
Last-minute breakouts are always suspicious, and even less credible on Friday. A retest of its extreme is likely to fail, but the retest is still likely – until it’s not. Gapping down under Friday afternoon’s 903’25 low would signal a session-long decline, and also reject any need to retest Friday’s high. It would also reject the “Friday Factor” that suggests 15 minutes of strength from the opening tick, regardless of whether that tick gaps up or gaps down.

Any lesser weakness would be likely to recover, and Sunday night we’ll look for pullbacks which might do that. Pessimism would be reflected in a retest of the high whose margin was measured in ticks instead of in points. Probing several points to 933’25 would give buyers a chance to prove they’ve gained traction, and give sellers a chance to prove they did not.

There are no scheduled econ reports, just one minor historic bankruptcy filing to mess with market opinion.[/pay]

[pay]Pattern notes.
There was only problem with extending Wednesday afternoon’s decline. The drop originated during a no-bias environment, which usually requires its complete retracement. It wasn’t a deal-killer for sellers, not if they could extended the decline without delay. The open’s gap up didn’t matter so long as the decline resumed from there, and it did.

The decline’s resumption was productive, turning negative and retesting overnight lows. But the overnight lows held as support through 10:15-10:30 to rob sellers of their traction. The balance of the session retraced Wednesday’s decline to its origin.l

With no unfinished business above the market, another downleg is free to begin. The retracement’s target was met with 90 minutes remaining Thursday, which is sufficient time to reverse down. Resuming the decline Friday would compensate for the delay by starting aggressively and productively. Therefore, modest weakness would suggest the decline was not resuming.

By the same token, extending the Thursday’s recovery should begin by gapping up above 911’00 for buyers to gain traction. Simply firming would still have potential to test 914’50, but the probe would be vulnerable to reversing back down. In either case, maintaining a rally’s gains Friday would be very likely to extend higher into next week for a brief probe of new recovery highs. No rally, or not holding its gains, would keep the door wide open for sellers.

Indicators and Internals.
RSIs deteriorated into Thursday’s highs. The most obvious consequence was to dip 7 points. But the setup also denied the rally an extra 7 points that would have been in-play on any higher high.Regardless, there was no technical business left unfinished at the close.

Friday’s opportunities.
Several econ reports are due, two pre-open, and then Chicago PMI and Consumer Sentiment post-open. Their relevance is enhanced by their staggered timing at 9:45 and 9:55. Look out for the rope-a-dope. This being a Friday, the morning’s bias signal is likely to persist through the noon hour’s exit.

Reminder.
I will be available next Friday only through the opening hour-plus. After tracking the Employment Situation report’s reaction past the first hour, it is unlikely that I will be back on-line before the close (unless there is an otherwise dramatic move). [/pay]

[pay]Pattern notes.
Ever since Tuesday’s open, sellers couldn’t seem to get started. Wednesday afternoon there was no stopping them. The overnight high was likely to be retested, but Wednesday’s two attacks on it both refused. The afternoon’s no-bias signal triggered, but S&Ps dived 19-points anyway.

The overnight high’s retest wasn’t required, just likely. And the drop started 10 minutes after missing the bias-down signal. Wednesday’s selling came from nowhere, but its arrival was expected. In fact, Tuesday’s mid-day running correction had already signaled that optimism was unsustainable. And the bounce potential to 908’00-910’00 was being tested through every relevant timing window.

Also, a break under 880’00 has been required since last Thursday’s test of the prior week’s lows. Not a probe under 880’00, but a break. It should be quite a break, since Tuesday’s interim bounce was quite a bounce. It refueled sellers, as did last week’s bounce up to 923’00.

Wednesday’s aggressive selling was sudden and relentless, and did I mention also aggressive? A drop is not a buy signal, but not falling further at Thursday’s open would be bullish for a near-term bounce. The higher, the better, to retrace Wednesday’s no-bias decline. But the selling is so long delayed and so well fueled that its immediate resumption Thursday would be credible for extending down sharply intraday.

Indicators and Internals.
RSIs were simultaneously oversold while Wednesday’s late low was printing. Overnight action has already fallen further, but it hasn’t tried to diverge positively. A bounce from here would be likely to fail, but no bounce is required.

Thursday’s opportunities.
A corrective bounce overnight or Thursday morning would target either 898’00 or 904’00. I would start getting bullish if that extended higher to also recover 907’00, but a new downleg would be expected meanwhile. No bounce is required, and an immediate break or gap down maintained under 884’50 might not find any sort of bounce before 867’00. Several high-profile econ reports are due.[/pay]

[pay]Pattern notes.
Tuesday morning’s rally was the only alternative if sellers weren’t immediately productive, because that would have left a void. The market detests voids, and it would have sucked in buyers to fill it. In fact, it did. Similar principles were at work Tuesday afternoon, but this time there was no void. The technical negative divergence produced only a modest pullback, but it was still a pullback. No void was left open for buyers to fill.

So it’s interesting that the cash session’s last-minute dip probed the morning’s 905’50 highs as support. The bounce into the close was a squeeze much like Monday morning’s Globex close, and it also held relevant resistance at the 909’00 bias-up target. Slightly higher highs printed after the cash session close, but no new ground was covered.

There is room up to 914’25 before considering buyers are gaining any new traction. That wouldn’t be considered otherwise, because Tuesday’s mid-day running correction suggests its next trending attempt should be the upleg’s last leg up. So 911’00 shouldn’t be exceeded through any relevant timing window.

Indicators and Internals.
There was no unfinished technical objective at Tuesday’s close. The early-afternoon negative divergence at 909’00 finally produced a meaningful pullback to nearly 903’00 after first touching 911’00. That said, oversold was never reached during the pullback. Since the last-minute bounce peaked under 909’00, the 903’00 low’s retest is possible. And since oversold never printed, the low’s retest cannot produce a positive divergence.

Wednesday’s opportunities.
The econ calendar isn’t empty, but it’s not very high-profile. Existing Home Sales might not confirm the extreme readings of Tuesday’s Case Shiller report. The EIA Petroleum Status report may be delayed one day. Generally the market should react to its own buying and selling interests, and less to external news. There is no specific required reaction to opening flat, weak, or failing an opening bounce. But a gap up above 914’25 would put into play a test of last week’s 923’50 high, whose eventual break higher would target new highs above 940’00. [/pay]

[pay]Pattern notes.
Iran rattles its sabers and draws them, more banks are seized, and the president announces that “we are out of money” while nearly drowned out by the sound of printing presses revving in the background (I made up the last part). Naturally, given all the bad news, Sunday night’s open plummeted bounced.

Apparently the market is unconcerned by these events, or the concern has been fully discounted. The open’s 6-point bounce to 891’00 retraced 61.8% of Friday’s last-minute dive to 883’25. The bounce’s retracement was supercharged by North Korea testing nukes and missiles. The spike down to 878’25  bounced sharply but the prior high wasn’t touched. The bounce was largely retraced, but the prior low wasn’t touched either.

A 4-point surge into positive territory at 11:30’s close made clear that pessimists were getting squeezed for having waited on something that wasn’t coming. Monday’s Trading Plan noted that Friday’s last-minute dive had already undone ineffectual optimism – it’s not surprising that sellers didn’t gain new traction. This puts the market in position for a bigger bounce Tuesday for having absorbed 2-3 steep, deep drops since Friday’s last minutes.

Those steep drops have also chipped away at support. So a bigger bounce won’t be expected if Tuesday’s open isn’t already triggering it. Indeed, if the open isn’t exploiting that it absorbed so much selling, then it’s probably because bigger selling was waiting for the retail crowd to return.

Indicators and Internals.
Holiday technical readings are taken with a big grain of salt, as are any session’s last-minute readings. Either end of the holiday Globex range were accompanied by overbought and then oversold RSIs. This would support expectations for any rally attempt to fail, from whatever level, and eventually to retest or probe the overnight low.

Tuesday’s opportunities.
S&PS resume trading at 6:00pm ET Monday. Sellers would be put back on defense by overnight action that positions for a gap up Tuesday above Friday morning’s 894’50 high. Its follow-through might only fill the gap back to Wednesday’s close up to 901’50; it might probe last Tuesday and Wednesday’s “higher prior lows” around 908’00. But anything that doesn’t close above 915’00 is probably all about refueling sellers. Without a bounce, sellers could make serious progress upon any break under 880’00 Monday night. Apart from a “lower prior high” around 871’00 and the fleeting obligatory support of prior lows, there’s not much untested left in this 11-week old rally.[/pay]