Market Wrap

[pay]Pattern notes.
First things, first. Friday’s close (basis S&Ps, the Dow and NDX) was the recovery’s highest, yet. But Friday’s intraday high failed to probe either of the two prior sessions’ highs. Those three sessions’ lows each still probed the prior two weeks’ highs as support. This continued overlap is not the character of a new upleg breaking out.

Weak buyers might be benign during any other stage of the pattern. But this stage is probing new highs, so it is by definition a breakout attempt And ineffectual optimism does not make for successful breakouts. Even if the past three weeks are interpreted as trending, the trend is obviously slowing.

Two sessions after Wednesday’s threatened breakout, and with the week having ended, buyers failed to prove a breakout underway. This does not mean sellers have proven anything – weak buying doesn’t necessarily mean that weakness is due to strong sellers absorbing them. But it is more likely. And three days of trying without success is like throwing chum into ocean waters.

The Snidely Whiplash pattern (“curses, foiled again”) has formed from three consecutive sessions probing prior highs without any one of the sessions gaining traction. The ineffectual optimism is vulnerable to resolving down sharply. The character of this resolution should be dramatic at its outset, gapping down sharply. That was made all the more possible by Friday’s post-close surge leaving cash at a 3-point discount. Friday’s post-close surge also narrowed the distance for stronger buyers to take control, which is almost the only way at this stage of the pattern to avoid topping.

Indicators and Internals.
Friday’s last-minute short-squeeze responded to a simultaneous positive divergence we tracked at the last half-hour’s low. The reaction offset the oversold condition with an overbought 3-minute RSI, whose high price was already repeated in the subsequent bar. There is no requirement to trade any higher, nor any sell-off protection.

Monday’s opportunities.
The econ calendar normally starts the week empty, but two reports are due at 10:00, timing that can accelerate or reverse any initial trending underway. A gap under 864’00-865’00 that extends down would signal a session-long decline underway. Any lesser weakness would be attracted up to fill the gap back to Friday’s 876’50 futures close, and probably higher. The downside would include 851’00 and 845’00. A test of either could still recover to close high enough that its sellers were absorbed, and perhaps the threat would finally attract strong buyers. Otherwise, probing higher highs first would still be suspicious. [/pay]

[pay]Pattern notes.
Thursday’s session did what Wednesday’s session did, and it did what Wednesday’s close did not. Both opens gapped up, both sessions probed new highs intraday, and both sessions’ gains were retraced back under the two prior bounce highs. Thursday’s retracement got a head start on Wednesday, peaking 90 minutes into the day instead of 90 minutes before its end. That provided an opportunity for buyers to regain their lost ground. It was an opportunity lost.

Sellers can’t be blamed – not yet: Thursday’s cash session closed negative by less than 1 point, thanks to a last-minute push down, and thanks to Wednesday’s last-minute push up. Buyers have only themselves to blame. After nearly four weeks of essentially ranging sideways, once again probing the range’s upper-end, buyers are weak. It’s not bearish, except that it invites sellers, much the same way a piece of chum can attract sharks.

Sellers can be blamed – not officially: Futures continued dropping after the cash session close, so far coming within 1 tick of Wednesday’s post-close low. There was no reason to reverse the entire gain after probing new highs unless the market’s intent were to continue dropping.

Sellers won’t be blamed: If a session doesn’t close under a prior low. Each morning’s higher high has opened up room to absorb intraday selling without it damaging the chart. The characteristics of the past two days of selling suggests that the open’s buyers are the type that appear at highs. That’s the first step to forming a top, buyers lose traction. Now we’re monitoring for the second step, sellers gaining traction in their place.

Indicators and Internals.
Thursday’s last technical signal was at the cash session low, with simultaneous oversold 1-minute and 3-minute RSIs. The vulnerability to a bounce was fulfilled, and the low was retested immediately after the cash session close. This setup might be attractive enough to be retested intraday Friday, too, but there is otherwise no active technical setup.

Friday’s opportunities.
The break underway into Thursday’s close targeted 857’00, which is still in-play. Follow-through might be limited to 851’00 after gapping down there Friday – if there were any follow-through or gap down, at all. A gap up above Thursday afternoon’s 875’25 high would signal a session-long rally underway. This being a Friday, the morning’s bias signal is likely to persist past the noon hour. The econ calendar is busy, but in place of April’s Employment Situation report there is some sort of Gheitner appearance.  [/pay]

[pay]Pattern notes.
Wednesday’s session traded exclusively in positive territory (optimism). Its intraday high probed two prior bounce highs (optimism). The afternoon’s high exceeded the morning’s high (optimism). The close was back under a prior high and under the noon hour’s high (uh-oh).

The rally dodged a bullet by not also closing under a second prior high. Starting the day from under two prior highs, probing both prior highs intraday and then closing back under them is a very bearish setup. Its follow-through tends to be immediate, so gapping down Thursday would get a benefit of the doubt for being triggered late. It would also get a tight stop, since there wouldn’t be any reason to bounce until having extended down under at least 857’00-858’00. The move would target 851’00 and 845’00.

Buyers lost traction by closing back under the noon hour’s highs. An overnight bounce isn’t likely, but it would be likely to fail. The same can be applied to sellers, who failed to gain traction by closing under the noon hour lows. As for the premise that a multi-week trading range is underway, Wednesday’s highs held a test of its upper-end, and the range remains intact.

Indicators and Internals.
There were no unfulfilled technial signals or setups at Wednesday’s close, except for one minor item. The 1-minute RSI diverged positively at the last half-hour’s low while MACDs made higher lows.The 3-minute RSI didn’t confirm this.

Thursday’s opportunities.
Overnight influences include a presidential speech. I will be on-line to comment on any reaction no longer than an hour after the speech. Thursday’s econ calendar is pretty impressive, from Jobless Claims pre-open to Chicago PMI after the open. Gapping down Thursday could extend, but it wouldn’t be as credible as simply sliding. Meanwhile, a gap up Thursday may be the only way this pattern resolves up longer than temporarily. [/pay]

[pay]Pattern notes.
From a contrarian perspective, optimism is a dangerous thing. But it’s fun while it lasts. Optimism was so heavy at Tuesday’s open that it prevented a retest of overnight lows down to 837’00. That might have been remedied if not for the Chrysler, IBM and Consumer Confidence news driving S&Ps up to 858’00. No news was still good news as the day’s mid-section ranged sideways at session highs. Also optimism.

Finally – at least, for optimists – the sideways ranging offered a false sense of security to prompt a momentary surge to new session highs at 861’50. Then, like the game of musical chairs, the music stopped. Optimism didn’t disappear completely, as it probably limited the last hour’s drop to test its 851’00 target.

Ending any timing window at a target can leave the market at Equilibrium. The first one or two trending attempts are retraced entirely, and often reversed more substantially in the opposite direction. This state can be rendered moot by gapping open beyond a prior high or low. We’ll look for signs of Equilibrium Wednesday, but not if the consequences of Tuesday’s excessive optimism include gapping down under 847’00.

The gap back to Tuesday’s opening print at 845’00 requires a retest eventually. This stage of the pattern has no reason to revisit it if not also intending to extend down. Sunday night’s 838’50 lows should still be probed, for example. That would have bee constructive to forming a durable bottom if done at Tuesday’s open. Now it’s probably too late for that, and lower lows would find its last support in the 800’s to be just under 820’00.

Indicators and Internals.
Tuesday’s last hour extremes drove 3-minute RSI to its own extremes, as much as possible without becoming overbought or oversold. No unfinished business was left outstanding.

Wednesday’s opportunities.
A gap up above 857’00 would get a benefit of the doubt for at least retesting Tuesday’s high, but it would otherwise be expected to hold as resistance. A gap under 845’00-847’00 would have a change at extending down sharply. But any trending attempt – perhaps triggered by GDP due before the session’s open –  must capture its territory early to avoid being paralyzed by anxiousness ahead of the 2:15 FOMC announcement. The president’s planned evening address could quickly reinstate the paralysis into the close.[/pay]

[pay]Pattern notes.
Monday’s post-open low was 851’00 and the morning’s bounce reached 866’50. The afternoon’s drop completely retraced the bounce back down to 850’50. This represents buyers failing to retake control. Of course, the return to the lows failed to extend down, so sellers also failed to retake control. Control is up for grabs, and it goes to whichever sponsorship can break out of the 848’00-859’00 range.

Either path is likely to begin by gapping open. A gap up would likely be sizable, testing 867’00, where a dip back down to 859’00 could launch a bigger intraday rally. A gap down doesn’t need to be much under 848’00 for sellers to gain traction, but any bounce it produces must reverse down quickly from 853’00. A gap down under 848’00 that doesn’t bounce before extending down would be shorter-lived before bottoming.

Sponsorship for a gap down is likelier, after Monday’s sellers repeatedly chipped away at the support of session lows. This doesn’t mean an immediate drop would stay down, so even if sellers take control at Tuesday’s open, they may lose it by noon if they haven’t extended down by then to 841’00-842’00.

From flu to fly-by’s, Monday’s environment offered several excuses for breaking under Friday’s lows. Overnight activity is likely to try, just as Sunday night’s drop did. But if sellers aren’t obviously in control coming out of the morning, buyers could be obviously in control going into the close.

Indicators and Internals.
Monday’s late bounce peaked while RSIs were either underperforming or diverging negatively. If combined with a retest of the morning’s low lacking any buy signal, the result could be dramatic – not necessarily permanent, but steep nonetheless.

Tuesday’s opportunities.
The econ calendar is busy, with unusual timing. None of the three reports due pre-open is very high-profile, but their staggered announcements could provide a swarm of punches that keeps the market off-balance. Consumer Confidence is high-profile, and comes 30 minutes after the open, which tends to accelerate or to reverse any trending already underway. Any and all of these reports can be dwarfed by bigger news. Maybe not so much anymore by an errant plane. [/pay]