Market Wrap

[pay]Pattern notes.
Friday’s last-minute dive was a great reward for those who stuck around. The false break upward only touched the 896’00-898’00 target’s lower-end, but it did the job of a rubber band nevertheless. Weak-handed buyers that would still bother buying were suddenly reminded how thin they were, and their frantic selling kick-started 12-point dive through the close.

The dive fulfilled its likeliest objective by testing 884’00, but stopped 2 points short of its potential to probe new session lows. That margin would be optimistic, except the dive was already very productive before it ran out of time. It’s irrelevant anyway, because the session already reeked of optimism for five hours of treading water intraday.

“Reeked,” as in past-tense. The last-minute dive undid the earlier ineffectual optimism. It also avoided closing under a prior low. A gap up above Friday morning’s 894’50 high would put sellers back on defense. Buying might only fill the gap back to Wednesday’s close up to 901’50, or perhaps probe 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.

Sellers could already be making serious progress under 880’00 Sunday 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.

Indicators and Internals.
Both 1-minute and 3-minute RSIs were oversold into Friday’s last-minute low, and a bounce from lower lows didn’t recover. MACDs also deteriorated along with price. So, there is no signal for any kind of opening bounce.

Sunday night’s opportunities.
The focus seems to be the U.S. credit rating, still highly rated, as was Fannie Mae at one time. The Dollar is the highest profile barometer of sentiment on this topic, and it satisfied two long-standing targets last week. Those targets could extend to sharply lower new lows if no recovery is underway by Monday night. The news and rhetoric both have been reaching for a crescendo, with Sunday news shows also firing away. Tuesday’s U.S. open could have the clearest picture available to it, and that might not be a good thing.

S C H E D U L E.
I will be available Sunday night and Monday morning. A new Trading Plan and all other coverage will be updated for Monday night’s Globex open. The normal 8:55am Morning Market Tour will resume Tuesday.[/pay]

[pay]Pattern notes.
The last blog post before Thursday’s close listed the reasons for a bounce. Its target was either 884’00 or 890’00, and in either case the bounce is done. Too bad, as I could have advocated holding long through the close. The pessimism of closing under 884’00 would have absorbed overnight selling pressure. And the pent-up buying pressure would have helped to resume the rally Friday.

Now resuming the rally Friday essentially requires gapping up to at least 893’00, above Thursday morning’s highs. Slightly softer or firmer through the open might be the day’s most exciting moments. No volatility is the worst thing for a trader, but there is potential of far worse for the market:

Recall that one of the reasons for Thursday’s late bounce was the test of last Wednesday’s pivotal low (the low prior to the actual low). While it all but requires eventually testing last Friday’s actual low, the pivotal low’s test normally produces a bounce back to prior highs. Target met. Having fulfilled the bounce potential, the decline is free to resume – with a vengeance.

Simply sliding at the open would suffice, but any break maintained under 884’00 would signal momentum had reversed down. A gap down under Thursday’s 878’00 low – which printed before the last hour – could also signal a session-long decline. Did I say, with a vengeance?

Despite the requirement to retest last Friday’s low, seasonal holiday bullishness could can come into play and extend a firm open, perhaps up to the 905’00 area. Unless and until 884’00 is broken as support, sellers can’t be relied upon to make any greater effort before next week.

Indicators and Internals.
MACD & RSI diverged positively at Thursday’s low to help signal the last hour’s bounce. Their potential has been realized, and no new signal was created before the close.

Friday’s opportunities.
This being a Friday, the morning’s bias signal should persist past the noon hour. The bond market’s early close often keeps things copasetic into the weekend. Sometimes it doesn’t. When something unexpected happens late in the day and Treasuries aren’t available to lay-off risk, price action can exacerbate the news item’s effect. Which is pretty much how nature intended, anyway. The whole scenario is unlikely, though, if 884’00-893’00 contains the open.[/pay]

[pay]Pattern notes.
My concern after Monday’s 26-point rally was that buyers were on-track to retest prior highs all too soon. The concern was alleviated by Tuesday’s sideways ranging. Then came Wednesday’s gap up above Tuesday’s highs. Rather than take time trending up and capturing territory, buyers bit off more than they could chew. Prior highs were attack as much as was required – 3 points more, actually – entering the noon hour back under Tuesday’s prior highs.

The past two weeks have been all about trapping buyers. The more trapping, the bigger the reversal down. Tuesday’s last half-hour drop showed  the market was running out of buyers to trap. Wednesday’s open certainly trapped buyers. The reversal down didn’t actually cross the line into negative territory until 3:20-3:30, having already falling 7 points since 3:00.

Not to say that Wednesday’s late downleg can’t extend down further, perhaps not as briefly as Tuesday’s Globex open, but recovered nonetheless. Well, less than Wednesday recovered Tuesday’s late drop – a bounce back up to the 911’00 area would neutralize Wednesday’s late selling. Buyers would gain traction above 915’00 for a more thorough retest of recent highs.

The alternative to bouncing here is that no more buyers are available to be trapped. This resolution should make itself obvious by extending Wednesday’s decline down sharply – if not from the open, then possibly after an opening bounce as described above. Under 901’25 there are only brief patches of obligatory support on the way down to the gap at Friday’s 883’00 close. Wednesday’s close was under 901’25, just late enough to undermine its credibility, but not to invalidate it.

Indicators and Internals.
Wednesday’s decline ignored at least two positive divergences (i.e. bounces failed to recover prior highs). This tends to mean that knowledgeable and influential market participants are in-touch with much bigger supply coming down the pipeline. A possible third divergence developed through the cash session close, and might yet be productive to save the day, or ignored on the way down to sharply lower lows.

Wednesday’s opportunities.
Lots of econ reports to keep the market busy. I questioned yesterday’s session-long rally setup in the face of Gheitner’s testimony and FOMC news. Any other such high-profile events Thursday might work to the rally’s advantage, undermining whoever currently has the ball. But opening weakness should extend dramatically if it’s valid, and recover into positive territory if not extended dramatically.[/pay]

[pay]Pattern notes.
Buyers are no longer at a risk of getting ahead of themselves. I was concerned about this after Monday’s sizable rally, which had already run halfway back to prior highs. Monday night’s higher high was retraced by Tuesday’s open, but intraday price action was attracted higher back to it throughout the day.

The attraction helped to save the first half-hour’s drop from extending, and it produced new session highs going into the last hour. But despite its obvious influence, the overnight high was never retested intraday. Sellers filled the void at Tuesday’s last half-hour, plunging 9 points to finish in negative territory, and another 3 points at the Globex open.

The cash session close was barely above the morning’s low, so it barely avoided damaging the chart. Simply failing to recover from negative territory through the open would keep buyers on defense until just ahead of the afternoon’s FOMC announcement. A bigger break, like under 901’25, could be very different – there are only brief patches of obligatory support on the way down to the gap at Friday’s 883’00 close.

Either way, a weaker open Wednesday could be stepping on egg shells all morning. But not if Tuesday’s late drop is invalidated at the open, by gapping up above 910’00-911’00. Immediate follow-through would be credible for extending higher through the morning to retest Monday night’s high around 916’00.

Any trending attempt will need to gain traction quickly, or else price action could become paralyzed by anxiousness ahead of the afternoon’s FOMC announcement. Its reaction, and the reaction to its reaction, should make up for any interim lack of volatility.

Indicators and Internals.
Both 1-minute and 3-minute MACD & RSI diverged positively when Tuesday’s last-minute low was retested at the Globex open. This didn’t stop the slide from extending 3 more points. At this moment, the slide has been retraced entirely.

Wednesday’s opportunities.
The open can either reject Tuesday’s late decline, or extend it, and any quick follow-through would likely beget more follow-through into late-morning. A flat open – not too strong, not too weak… just right – could be comfortable ranging narrowly until the FOMC announcement nears.[/pay]

[pay]Pattern notes.
Too much, too soon? A gap up above 886’50 and quick recovery of 890’00 wasn’t just expected to put buyers back in control. More so, it would make Friday’s selling contrary, and last week’s selling corrective, with a new and powerful upleg gaining steam through the week. That might not be possible if the pace from Monday’s rally doesn’t slow.

Monday’s gap up eventually extended to nearly 909’00 for a 26-point gain. At this pace, prior highs above 9278’00-929’00 will be tested Tuesday. My week-long rally scenario depended upon the Memorial Day holiday’s seasonally bullish influence to pull price higher to or through resistance. That influence isn’t relevant much before Thursday, and sometimes not until next Tuesday.

The powerful upleg need not do much more than probe prior highs – in other words, rally from the range’s lower-end to its upper-end, all within the context of still ranging around 905’00. A second consecutive intraday 26-point gain isn’t predictable, but a break to new highs would be difficult if Tuesday produces anything close.

There’s also the risk that Monday’s rally expended too much energy by already filling the gap back to last Tuesday’s ~905’00 close. That would be the conclusion upon closing Tuesday back under 901’00 where Monday’s last half-hour’s upleg originated. Gapping open under the 898’00 area would take it a step further and signal momentum reversing down, into a session-long decline.

Indicators and Internals.
Overbought 3-minute RSI at Monday’s close wasn’t very reliable timing for creating pullback protection. But gapping down slightly would still be likely to fill the gap before extending down much further. There is otherwise no unfinished business from Monday’s session.

Tuesday’s opportunities.
A gap down under Monday afternoon’s last relative low would put sellers back in control in a big way. Otherwise, simply by not rejecting Monday’s late gain, sellers would signal that they probably aren’t going to prevent a retest of prior highs.[/pay]