Market Wrap

[pay]Pattern notes.
Did you know that roller coaster enthusiasts have a wide choice of organizations to join where they can share their passion with like-minded thrill seekers? Imagine the effect on their membership rolls if they were exposed to the following “Big Picture” charts. Perhaps not that many if they don’t like the roller coasters in danger of derailing from its tracks.

This first chart, alone, resembles an entire roller coaster ride. It includes the bear market’s two most recent lows from November last year (“NOV”) and from March last month (“MAR”). Each low’s recovery differed in its structure: the previous bounce recovered a majority of its ultimate gain in one week, while the current recovery took three weeks for the same move. It’s not a small difference, but it’s a lonely one, as most other major characteristics are repeated. Most important is that their steep trajectories going into each low were similar, as were the relatively short durations between directional changes.

Neither characteristic on its own disqualifies the low from being a bottom, but they often do. Neither characteristic defines the current bounce’s peak, but it is interesting to note two other similarities: the current bounce’s high last week equaled the previous bounce’s time and price measurements. It is also interesting that the last downleg’s origin (“JAN/FEB”) has been retraced. Other than being natural resistance, this price point doesn’t provide much analytical value. However, for reasons described later, this leg’s sponsorship is all but depleted and lacking energy to sustain an attempt to break any higher.

This second chart includes the bear market’s 2007 origin (“JUL/OCT”) highlighted appropriately in rose-color. The first chart’s section is highlighted in green, only because brown would obscure the price bars. I include this image to put into perspective the current range’s height and duration compared to the bear market’s damage. These characteristics don’t really speak to whether a bottom has formed. But the relatively short and/or shallow bounces during 2008’s portion of the decline reveal that plenty of unsatisfied selling pressure awaits any recovery attempt. This pressure never need be probed for its influence to inhibit bounces.

The final Big Picture chart shows the 2002-2007 rally, a roller coaster enthusiasts dream. It also shows the preceding decline’s steep bounces that gave sellers ample time to lighten their loads. The rally’s buyers hiked easily through the field above it, its brush having been cleared by everything from machete to controlled burns. The current bear market, depicted in the prior chart and highlighted here in yellow, has only been weeded.

In the same chart’s lower-right corner, highlighted in green, is the current bear market’s two most lows. This is the range depicted by the first Big Picture chart above. Our roller coaster enthusiasts view of this is a ride that has returned to its beginning. It’s just a platform for loading new passengers for another turn. This perspective would have served well at 2007’s high, and it might continue serving for the current bounce’s purposes (although there’s reason to think otherwise, detailed later). But the Big Picture wonders whether the bear market has ended and a bottom has formed. In this context, contrary to higher highs making new lows less likely – when the lows already require being retested – new lows would likely be deeper.

So, what about this move up from March’s low. Has the bear market rally ended? Its minimum target was 800’00, which could have sufficed as the bounce’s peak. It didn’t, which started shaping the perception of a bear market rally underway. The bounce’s target was alternatively 821’00-825’00, whose tests produced two reactions down, but neither closed under a prior low to reverse momentum down. Enter 844’00, which was the target either of a bear market rally, or of a bear market rally’s first leg. Since meeting it over a week ago, the question has been whether higher highs are waiting to begin the next downleg, or beginning the next upleg.

So far, each probe above 844’00 has been dismissible for being only a retest of prior highs, or noise around prior highs, or noise around a prior high’s retest. And so far, each higher high’s reaction down has substantiated the dismissive attitude. Friday’s new intraday high falls into the same category for closing no higher than a prior session’s high, and so fails to qualify as a breakout. This creeping territorial gain is a sneaky way for bear market rallies to maintain their momentum. It is Newton’s first law of physics waiting for the third law to be imposed. This week’s quarterly earnings deluge might finally bring an opposing force that ends this leg of the roller coaster.

Please post any questions or discussion points to this blog post’s comments section. Next week I will update the big picture, and review major indexes.

Indicators and Internals.
Both 1-minute and 3-minute RSIs were oversold simultaneously at Friday’s early-morning pre-open 853’75 low. The timing makes its retest only somewhat likely. A similar setup intraday would be more representative of influential participants. That would be Friday morning’s 856’75 low, where RSIs were simultaneously oversold again. Expiration may have influenced their recoveries, but cannot prevent a required retest.

Monday’s opportunities.
This is a big earnings week, most notably among Banks, in addition to glimpses offered by IBM and AMD. The only econ report due is Leading Indicators 30 minutes after the open, timing that tends often to reverse or to accelerate any initial trending underway. Bernanke speaks at 2:00, so there is plenty of opportunity to skew price action. Friday’s expiration session missed every opportunity to gain traction during a relevant timing window. The subsequent Monday tends either to duplicate or to mirror Friday’s expiration charcteristics. This makes a blow-out rally unlikely, and suspicious if one were to develop.[/pay]

[pay]Pattern notes.
Thursday’s session was on-track for just another day ranging around 844’00. The open reversed down from its 854’50 gap up limit, which was later revisited after a brief detour down to 844’00. A dip back down to 849’00 reversed up 18 points up to new highs at 867’00. The 854’50 level also represented last Thursday’s pivotal high, the high prior to Monday’s 861’75 actual high.

I hate to kick a market when it’s up, but here goes.

After holding two dubious tests, the pivotal high’s third test put into play the actual high. The late surge’s optimism was neutralized by fulfilling unfinished business at higher prices, within several minutes of having created it. The close retraced 7 points from the high, which wasn’t bearish until retracement ended back at Monday’s prior high. This means buyers didn’t gain any new traction, so it could still be characterized as part of the existing range around 844’00.

That late surge also ignored a no-bias environment, so its gain from 852’00 should still be retraced. The retracement need not begin immediately, and it need not extend in the opposite direction. Thursday’s high is likely to be probed first, unless Friday’s open were to gap down under Thursday’s 854’50 prior highs.

All of which makes it difficult for Thursday’s new high close to qualify as a breakout, because this requires a second consecutive higher close. The no-bias rally’s retracement could be delayed until Monday – it often is delayed by two days when not retraced in the same session it was created. A quick retracement Friday morning could still recover to close at higher highs. With at least two scenarios for extending the rally, not doing so would suggest ample selling pressure, and probably be a sharply lower close.

Indicators and Internals.
Another problem for recovering Friday is that 3-minute RSI was overbought throughout the rally’s last 10 points. This tends to be followed by a significant retracement. Thursday’s close had already alleviated the overbought situation, so this instance might get a pass. It probably needs one if Thursday’s new high close is going to be confirmed as a breakout.

Friday’s opportunities.
Earnings continue to influence price action, and Citi is due before Monday’s open. Consumer Sentiment comes 25 minutes after the open, timing that can influence any initial trending underway. Fed Chair Bernanke is scheduled to speak at noon, which can influence eyelids. This being a Friday, the morning’s bias signal is likely to persist past the noon hour, so it probably can’t be no-bias if the speach contains any surprises. [/pay]

[pay]Pattern notes.
The final score for Wednesday’s session between bulls and bears is 3-2. Three probes under Tuesday’s low were each recovered, but only two probes into positive territory were reversed down. The third made up for all others by testing the afternoon’s 848’25 bias-up target, having started from fulfilling a test of the 835’00 bias-down signal.

Had the session closed negative, it probably would have qualified as “ineffectually pessimistic” and made a rally likely Thursday. (Closing too negative Wednesday, e.g. under Tuesday’s low, would have been effectual.) Instead, Wednesday’s last-hour rally borrowed against that potential bullishness. The rally started with the hour, but new session highs waited until after 3:35 when price action is heavily influenced by end-of-day position squaring. No doubt the surge was exacerbated by anticipation ahead of JPM’s high-profile earnings due before Thursday’s open.

A word about 844’00: I’ve been referencing this level quite a bit lately because it is the highest calculable target for this stage of the bear market rally. Last Thursday’s attempt to break higher was rebuffed twice Monday. So long as price action can be characterized as ranging around 844’00 – e.g. within the noise range, false break rejected, etc. – the target is presumed to be holding. The level itself is not a signal for another move, so closing above it isn’t sufficient to trigger a new upleg, any more than closing under it would trigger a downleg.

Indicators and Internals.
Technicals left no unfinished business above. They did deteriorate into Wednesday’s last-minute higher highs, but not enough on their own to create a sell signal.

Thursday’s opportunities.
The econ calendar is busy, and the earnings calendar is also influential with JPM pre-open and GOOG after the close. Wednesday’s close was at equilibrium since it was testing a target (849’25). The next trending attempt is likely to be retraced and then reversed more substantially in the opposite direction. This likelihood would be rendered moot by gapping far enough Thursday – either above 854’50 or under 841’50-842’50. The gap up limit is also Thursday’s high, the pivotal high prior to Monday’s actual high. Just touching the pivotal high all but assures testing the actual high. The actual high could still hold its test, especially if preceded by a short and shallow pullback.[/pay]

[pay]Pattern notes.
Once back under 844’00 Tuesday, the market was unable to recover. Perhaps it remained under pressure due to day’s speeches. They offered nothing new, so perhaps the subsequent lack of recovery was paralysis ahead of INTC earnings. So, who was being restrained – buyers, or sellers? The morning’s drop expended a lot of selling pressure, and there was sufficient time to gravitate higher.

The morning’s drop never extended lower intraday, but I still consider it to have been productive since 844’00 wasn’t recovered. Gapping open Wednesday above 844’00 would suggest sellers weren’t that productive after all. Otherwise, Tuesday provided yet another set of evidence that the recent ranging around 844’00 has been distribution, not basing to launch another upleg.

Indicators and Internals.
Technicals left no unfinished business at Tuesday’s cash session close. The first reaction down on INTC’s earnings did get a bounce from 1-minute MACD & RSI diverging positively, but that has already resolved in a lower low.

Wednesday’s opportunities.
The post-close reaction to INTC’s earnings gapped down and quickly met the afternoon’s 834’75 bias-down target, next targeting 830’25. Lower lows soon came within 3 points. If a gap remains open back to Tuesday’s ~840’00 close, it won’t require being filled, but filling it would likely include a test of 844’00. The econ calendar is busy, including the afternoon’s Beige Book. [/pay]

[pay]Pattern notes.
W’ve been operating under the premise that Thursday’s opening gap up was only a retest of prior highs, prior highs that had fulfilled the bear market rally’s 844’00 target. In this context, Thursday afternoon’s higher highs were only noise around the target’s retest.

Monday’s gap down under that noise was appropriate within this context, although it was too shallow to preclude a recovery to retest Thursday’s high. The entire morning was spent in negative territory, creating “ineffectual pessimism.” So far, the premise remained intact.

The “ineffectual pessimism” was exploited by the afternoon’s retest of Thursday’s high. A second higher high probed it by nearly 7 points. Thursday’s high was retested thoroughly, and a close above it would have invalidated the premise of a retest. Instead, Thursday’s gap up would be confirmed as a breakout signaling the bear market rally leg’s extension.

Markets work in mysterious ways, so it was of course interesting when Monday’s late probe into positive territory was retraced back under Thursday’s high. The breakout premise was not confirmed. This is not in itself a sell signal, but it does tend to become one. Buyers created an opportunity Thursday to gain traction and failed to do so at the next opportunity. This leaves a void, with one more opportunity for buyers to fill it. The market doesn’t like a void, and will suck in sellers near Tuesday’s open if buyers haven’t reasserted themselves convincingly.

Indicators and Internals.
MACD & RSI diverged negatively into Monday’s high, and the setup was already productive. The 1-minute indicators improved as the last-minute drop’s lows were forming, so a retest of Monday’s high can’t be discounted.

Tuesday’s opportunities.
Goldman Sachs (GS) pre-announced earnings after Monday’s close, having been scheduled pre-open Tuesday. This clears the smoke for other pre-open news, essentially from the econ calendar. The president is speaking at 11:30, which should keep things lively. Intel (INTC) is scheduled to announce after the close, which might make pre-close price action revealing.

A gap up above Monday’s 861’25 high would be a first step towards rejecting the last-minute dive. (Since this was Monday’s high, a session-long rally would not be signaled.) It would also be a first step to trapping more longs, so there wouldn’t be much tolerance for hesitating to follow-through. A downleg doesn’t need another kick-start of failed higher highs, and would only need negotiate breaks under 850’00 and 844’00. [/pay]