Market Wrap

[pay]Pattern notes.
Last week’s first Trading Plan included a Big Picture outlook that was bearish, which seemed prescient after Monday’s steep drop. The balance of the week worked its way back to the prior week’s close.

After Monday’s drop, the next three mornings tried to resume the drop (highlighted red), twice gapping down into negative territory and then once turning negative after gapping up. Each effort failed to earn sellers traction by the close, similar to two weeks earlier (highlighted green). The third strike in each case was followed by the following session’s gap up and intraday trending higher (circled green).

The “Strikeout” setup punishes ineffectual sponsorship for draining their energy after three consecutive sessions. Ironically, the reaction can have its own consequences for expending too much energy too quickly. Friday’s close may have avoided this trap by stumbling into the cash session close, but futures recovered it all before the weekend.

Having probed the prior high’s consolidation, buyers are all but required to gap up above the 872’00 prior high if the rally is extending. Otherwise, prices remain within the range, a range that has yet to shake its characterization of ranging around 844’00. Still range-bound, at the range’s upper-end, having just filled the prior high’s outstanding gap – rejecting a gap up Monday, or not gapping up at all, might find that buyers had expended their own energy.

Indicators and Internals.
MACD & RSI diverged negatively at Friday’s highs among various periods. The last-minute dive might have sufficed already to fulfill the setup. But buyers don’t appear to have gained any traction when futures recovered most of the drop. Immediately trading to a higher high could easily register another negative divergence.

Monday’s opportunities.
The econ calendar is not a factor, but earnings announcements continue to be influential. Recently, so have been comments made by administration officials appearing on Sunday morning’s political talk shows. If this weekend’s budding pandemic is more than sensationalist, it should already be affecting Sunday night’s price action. Gapping down Monday under 855’00 would give sellers control when they could do the most damage, and the worst kind. [/pay]

[pay]Pattern notes.

“Curses, foiled again!” – Snidely Whiplash, The Adventures of Rock & Bullwinkle

Thursday was the third consecutive morning that S&Ps probed negative territory, yet reversed up above the open’s highs. On Tuesday and Wednesday, the difficult part of that sequence was reversing back up into positive territory, despite having gapped down. But Thursday’s open gapped up before reversing into negative territory, so the recovery above morning highs was that much more impressive.

Anyway, Thursday’s dip into negative territory was the third consecutive attempt to resume Monday’s downleg. And Thursday’s close was the third consecutive failure to do so. Monday’s Tuesday’s close was the product of a session-long rally, and Wednesday’s late drop still closed above the morning’s low (futures continued dropping after the cash session close). Thursday’s session didn’t turn negative until after gapping up, and a recovery from negative territory extended to new session highs.

That’s three consecutive attempts to resume Monday’s decline. And three consecutive failures. Sound familiar? It’s the same principle that defined Apr 6-8 which tried three times to close decisively under 819’00-821’00. Sellers were foiled again, and the very next session gapped up 17 points. The current pattern’s critical support is 833’50, which has also held multiple probes as support. Is another big gap up coming?

Gap up, or gap down. Higher highs after Thursday’s close have now been retraced, back down to 844’00. Thursday’s last surge expended all near-term buying pressure. This didn’t prevent higher highs after the close, but it’s trying to make them fail. Thursday’s recovery either extends up Friday, or it falls flat on its face. Anything can happen overnight.

Indicators and Internals.
The last technical indication of import Thursday was the simultaneous overbought RSIs (both 1-minute and 3-minute) and the last-minute high. The high was after the cash session close, so it doesn’t require a retest. But overbought is overbought, which benefited the overnight  dip.

Friday’s opportunities.
The econ calendar has two high-profile items, and multiple earnings announcements. If a rally isn’t underway quickly to resume Thursday’s gains, then the overnight drop won’t be ignored. [/pay]

[pay]Pattern notes.
Well, that was interesting. the morning’s rally robbed sellers of their traction and tried to duplicate Tuesday’s intraday recovery. The bounce’s high stopped short of its target, a test of Friday’s 857’50 lows. The pessimism helped to limit the pullback’s duration, but buyers didn’t gain any new traction on the afternoon’s higher high. All upside potential had been fulfilled, but the day’s clock had yet to run out. What to do, what to do…

The last half-hour’s slide to new session lows seemed an odd way to reconcile the day. But it was entirely appropriate since any sell signal would target the lows. The slope was simply a function of there being so little time to fulfill the target. Had the setup appeared earlier in the day, its path would have been much less direct.

There is a flip-side to this setup being fulfilled so quickly, in that sellers didn’t gain new traction. All they accomplished was a return back to the origin of Wednesday’s bounce. And they’ve expended a lot of energy doing so. This is a sly trick that trends use to absorb counter-trend action, similar to how Monday’s drop bottomed. The difference this second time is it is the second time. Trends don’t get to use the same trick repeatedly. That having been said, resuming Wednesday afternoon’s drop at Thursday’s open requires gapping down. Not gapping down Thursday would almost be bullish.

Indicators and Internals.
Simultaneous negative divergences among 1-minute and 3-minute MACD & RSI correctly predicted the last-hour’s highs. Positive divergences accompanied the last-minute lows, suggesting potential for a bounce overnight to the 846’50 area. So far, GM’s summer vacation news is overshadowing earnings news from AAPL and EBAY and leaving S&Ps stuck near Wednesday’s lows.

Thursday’s opportunities.
Earnings continue to influence price action, both in reaction and in anticipation. Thursday’s econ reports are high-profile, as well. But most relevant to Thursday’s open might be the overseas markets, and how they reacted overnight. Firmer overseas markets that don’t trigger a double-digit gain in S&Ps would suggest more downside planned intraday. [/pay]

[pay]Pattern notes.
Tuesday’s pre-open low stopped 2 ticks short of the 822’50 bias-down target. If the narrow miss were considered close enough, the intraday recovery would still be labeled a “no-bias rally.” And it would still require being retraced back down to its 826’50 origin. That’s 20 points under Tuesday’s close, and it could be 30 or 40 points from the recovery’s actual peak.

The intraday recovery stopped short of its potential to 850’25, which is now Wednesday morning’s bias-up signal. Its recovery would put into play a test of Friday’s 857’50 lows as resistance. It was Monday’s gap under these lows that made it unneccessary to fill the gap back to Friday’s ~866’50 close. The gap still wouldn’t need to be filled if Friday’s lows push back to close under 850’25.

A gap down Wednesday to 841’00-842’00 might dip another 2-3 points before recovering to resume Tuesday’s rally. Gapping down forcefully, to or through 837’00-839’00, would trigger a session-long decline. Quickly reversing down from an opening surge – essentially the inverse of Tuesday’s open – would have to reverse sharply if sellers plan to repeat Tuesday’s reversal.

Price action can still be characterized as ranging around 844’00. The bigger picture remains intact for a bigger top to be forming. But the case for that is going to fade fast, now that an attempt to drop under 844’00 has failed to follow-through. Sellers made their play Monday, and can’t delay proving Tuesday’s bounce was all about refueling sellers for a bigger move.

Indicators and Internals.
Tuesday’s intraday price action didn’t respond much to 1-minute setups, but did honor 3-minute divergences when they appeared. And they did appear, which means buying pressure went through several cycles intraday. The session’s rally was not necessarily a single move, and might prove to be nearly completed.

Wednesday’s opportunities.
It’s a relatively slow news day, although crude’s significant recent weakness has likely generated a lot of attention for the EIA report. The day should be largely defined by the opening reaction, and overnight action could leave Wednesday’s open looking much different than Tuesday’s close[/pay]

[pay]Pattern notes.
Monday’s open gapped down and slid throughout the day, but the drop’s momentum ended well before noon. Rather than diminish the chart’s eventual damage, back-ending the slower pace only adds to the suspense. Think “Theme from Jaws” and imagine the menacing creature circling just beneath the surface, only its dorsal fin exposed. Feeling safe?

Actually, sharks rarely expose their dorsal fin, except when appearing as a scale model in a movie. Let’s be more realistic. So, imagine a small trawler without dry land in site. A great white has been knocking into it repeatedly, gradually chipping away at the ship’s integrity. But this ship isn’t “Orca,” she is the “830’00.” She’s taking on water, but her crew won’t go down without a fight.

Monday’s repeated probes of the 830’00 target have chipped away at its support to help it give way. So would a drop from the 841’00 area. Of course, this would require a bounce up to the 841’00 area – whether overnight or intraday. A failed bounce would be entirely appropriate after Monday’s equilibrium close, coming after a trend’s target was met, and before the trend put a new target into play. Equilibrium’s first trending attempt is likely to be retraced, and reversed more substantially in the opposite direction.

Equlibrium can resolve in either direction, so a recovery could be expected if there were an immediate drop down to the 823’00 area – whether overnight or intraday. But bouncing first is more likely because Monday’s low had the same characteristic that undermined last week’s highs. This time it was the low’s test of a prior low that failed to close under it, robbing sellers of their traction. Gapping open up above the 841’00 area or gap down under the 823’00 area would break free from equilibrium’s orbit. Either would signal a session-long trend in that direction.

Indicators and Internals.
Monday’s slow drip-drip-drip pace of successively lower lows kept RSI from becoming oversold. Without an oversold RSI accompanying one price low, a lower low in price can’t be accompanied by a positive divergence. A bounce is not impossible in this setup, nor is it terribly unlikely. But the bounce’s origin would not be a base substantial enough to launch a sustainable rally.

Tuesday’s opportunities.
Earnings season continues to influence price action. More so now since the weekend’s public policy discussions have been thoroughly disseminated. Oh, wait. Kansas City Fed’s Tom Hoenig gives testimony to Congress and it might be a distraction after the open. The combination might foster an environment for initial trending to reverse intraday. Not for the sake of reversing, but because the initial trending had become unsustainable. [/pay]