Market Wrap

[pay]Pattern notes.
The interesting thing about Thursday’s rally wasn’t its size, and it wasn’t the particular levels that were recovered. Thursday’s rally was interesting for what it lacked: any meaningful pullback.

Except for the opening 15 minutes of volatility that dipped to test the 713’50 bias-down signal, no other pullback even threatened a prior low. Rarely did a dip even touch a prior high before its consolidation resolved in new session highs. Buyers were too impatient to allow a healthy pullback that might trap shorts whose subsequent covering could fuel the rally.

We know the sentiment behind this impatience as being optimism. And we know impatient optimism is not the stuff of bottoms. It is not necessarily the stuff of tops, but that’s a lot closer to reality. So, with the context identified, it is at this point interesting too note what levels were recovered this week already, and what was not.

February’s last two sessions began the steep slide into last Friday’s low. Those sessions ended a week of ranging sideways, repeatedly probing 774’00 as resistance. But it was a close at 757’00-758’00 and a gap under it that left the range behind. Whether a corrective bounce is ending or just getting underway, one or both of these levels should be given the opportunity to reject another recovery attempt.

Indicators and Internals.
RSIs diverged negatively at different points throughout Thursday’s rally. They correctly identified the pace slowing or a deeper dip about to begin, but none of those became anything noteworthy (except for their lack of noteworthiness, which is in itself noteworthy). Sellers couldn’t gain traction. Even the very last-minute very minor probe of the prior high, whose RSI diverged negatively, has been followed by at least nine hours of ranging narrowly. A lot of buying energy is expeded to retain control, so the first or second deep pullback should be pretty final for the rally.

Friday’s opportunities.
The overnight reaction to Thursday’s rally is again shallow, suggesting optimism is alive and well, and capable of producing at least one more higher high. The 757’00-758’00 area isn’t a big leap from Thursday’s peak around 750’00. If not rejected early, then 774’00 might be attacked soon after the noon hour. Initially dipping would be likely to recover, even if only temporarily. Not recovering intraday from an initial dip would be the most bullish scenario, showing buyers to have overcome their impatience. Right. Not very likely with the sentiment having served them so well all week.[/pay]

[pay]Pattern notes.
Wednesday’s ranging ultimately closed too low for the session to be considered an extension of Tuesday’s rally. The open was higher, but it was absorbed by a reversal into negative territory. An afternoon surge nearly reinstated the session’s more bullish qualities, but the closing action dipped too far.

That’s not to say Wednesday’s gain had no bullish qualities. It did trade mostly positive, and chipped away at resistance throughout. But in so doing, the pattern fulfilled all minimum targets of any lower accumulation patterns. Rather than extend through the targets the market reacted down, and failed to form new accumulation patterns with higher targets.

Overnight action slid further to help reveal Wednesday’s lack of contribution to the rally’s effort. A couple of early-morning surges are threatening to recover back above Wednesday’s critical 714’00-715’00 lows (717’00-718’00 basis Mar). If not successful, all of Thursday’s session could range under Wednesday’s lows, back inside Tuesday’s range, undermining the efficacy of Tuesday’s gains. The the rally’s effort could be salvaged by closing above the 705’00 area today (preferably after probing it intraday) to attract more buyers comfortable at the relatively shallow pullback.

Indicators and Internals.
The Jun contract replaces Mar as front-month beginning with the cash session’s opening tick at 9:30 ET. No business was left unfinished from prior trading – some was created overnight, but already neutralized.

Thursday’s opportunities.
This morning’s econ reports generated an initially favorable reaction, a surge that furthered the improvement above 714’00-715’00. Maintaining the gain could avoid any cash session trading in Tuesday’s range, which would then require a close above Wednesday’s high to avoid being considered distribution.[/pay]

[pay]Pattern notes.
There was a double-whammy behind Tuesday’s surge: word leaking out that will be reconsidered, and upbeat comments from Citi. The rule’s consideration is a month away, and Citi’s news was from an internal memo. Anyway, the reaction among financial stocks was 180° from what had been pervasive bearishness, a welcome change in sentiment that produced a 14-point gap up above Monday afternoon’s highs.

Having come after Monday’s close was biased down, the gap up formed a setup triggering a session-long rally. The rest was history, a post-open 31-point session-long rally. Those 31 points were also only a formality, their only peculiarity being the actual tally. What’s important is that the session-long rally literally rallied session-long. Optimistic from beginning to end, the intraday action contained several other such instances. Sellers simply weren’t a factor.

A last-minute surge avoided closing back under the afternoon’s two prior highs. It was touch-and-go until the last 5 minutes, so the afternoon effectively ranged sideways. Treading water doesn’t refuel sellers, and it expends a lot of buying energy. If the rally were to extend Wednesday, then it would be the product of new sponsorship coming out of the woodwork; Tuesday’s buyers are spent.

Indicators and Internals.
Tuesday’s extremely wide margin between up and down volume is nearly impossible to maintain. Maintaining it Wednesday would immunize the market from another downleg for multiple days, perhaps weeks. Tuesday’s volume was similar to Monday, whose pace was already a little slow. That’s not a deal-killer for buyers, because volume shouldn’t be stellar on a a bear market rally.

Volume is almost sure to expand if the rally extends through Wednesday. It should contract on any pullback – whether intraday or through the close – or else the decline could resume going into the weekend.

Wednesday’s opportunities.
The econ calendar is conveniently shallow, and not a distraction. The open’s most important characteristic will be whether buyers get ahead of themselves. An opening surge that is reversed entirely would suggest as much. But an opening dip could be as bullish as maintaining an opening surge’s gains. A gap open under Tuesday afternoon’s 707’00-709’50 prior lows would signal a session-long decline, poetic justice that would seriously undermine the quality of Tuesday’s rally.[/pay]

[pay]Pattern notes.
Friday’s last-minute surge wasn’t retraced entirely at Monday’s cash session low. The overnight low had been deeper, but still stopped optimistically short of probing Friday’s low. Not that there’s anything wrong with optimism. But it’s wasted on preventing a required retest, and sorely missed when trying to extend a bounce.

Monday afternoon’s low probed, retested, and essentially closed under 674’75. This bearishness was in-line with printing new session lows into the last hour, and with sellers controlling the 3:20-3:30 window. The decline could have extended down from there without leaving any unfinished business above. The decline’s resumption is nevertheless likely so long as price is orbiting around Monday’s low.

That orbit is being challenged by an overnight bounce that has gained 10 points to 686’00. The follow-through from Monday’s close might have been limited only to retesting Friday’s low, not by a little, but probably not much more. Extending the decline now would find sellers refueled, to the extent that overnight action can refuel intraday sponsorship. The trade-off would be a deeper extended decline.

But rallying any higher than 686’00 would start to break free from the magnetic attraction of Monday’s low. A strong enough gap up is the only way to do escape the consequence of having broken under 674’75 Monday. Sellers would be shut out once again, as a session-long rally was signaled. Otherwise, the overnight refueling would likely trigger a session-long decline.

Indicators and Internals.
Technicals began diverging negatively after midnight, causing an extending sideways range. Technicals were mixed on a break higher and the break higher was almost immediately retraced. The 3-minute RSI was at its lowest oversold at the overnight price low, a setup that would require a retest had it formed intraday.

Tuesday’s opportunities.
Back under 680’00-681’50 would signal the overnight bounce’s momentum was reversing down. Sellers first challenge would be to break under 677’25 again. The next test of 674’75 need not offer the slightest obligatory support anymore before extending down. Gapping up above 686’00 would be a good step towards reversing the trend up, and aI wouldn’t count on much hesitation at rallying throughout the day. But the bearish resolution continues to be more likely.[/pay]

[pay]Pattern notes.
Friday’s steep opening surge was reversed into negative territory through late-morning. A bounce into the noon hour digested the volatility. The bounce meanwhile formed a critical pattern whose break would challenge bullish resolve (I published a chart of the setup). The break came, and S&Ps went, dropping 10 points in 2-1/2 hours.

The story doesn’t end there, but it took an unexpected turn, surging instead of dropping. Oh, is that all. Actually, it’s a critical factor. The last-hour’s move did comply with the template’s other characteristics: it measured over 20 points, pursuing a steep and relentless slope that ticked lower higher into the bitter end. In short, it was the correct outcome, with but one exception: its direction.

I can’t say nothing justifies the bounce. The bias-down target had been met, technicals weren’t deteriorating into lower lows at 665’75, and a 20+ point move had been triggered. New afternoon lows late-Friday are vulnerable to steep moves – my setup depended on it. That vulnerability applies also to steep swings. The outcome was diametrically opposite from expectations because the last hour’s new session lows were too late to be considered only a retest of prior lows, and because sellers controlled 3:20-3:30. Sellers established their position, earning themselves a rest, and then having the audacity to actually take it.

The surge’s squeeze-like proportions aren’t yet a problem for the decline. Despite extending still higher past the cash session close, the March contract settled under Tuesday’s prior lows. Bulls can rectify this by invalidating the interim drop – gaps up above 700’00, 710’00, and 724,00 would be increasingly persuasive on this point. I’ll assess strong intraday gains if they arise. Otherwise, a new trend low in Friday’s last-hour disallows it from being a trend’s low.

Indicators and Internals.
I mention above that RSIs weren’t deteriorating into the last-hour’s lows. But never to a relevant degree. Neither the 1-minute nor 3-minute readings was initially oversold for a retest to diverge positively. Each became quite overbought into the last-minute surge, so only a meaningful gap down can prevent some sort of extension Sunday night or Monday.

Monday’s opportunities.
The last-hour surge didn’t slice through the fails-safe buy signals at 673’75 and 679’00, so neither requires being retested as support. The signals have already been well-rewarded, so retesting either shouldn’t be possible by a mere retracement. But first things, first. The “Friday Factor” suggests that Monday will rally from its opening tick, because Friday’s opening and closing ticks both rallied.

This doesn’t prevent the opening tick from gapping down, but it does make it more difficult for an immediate dip from the opening tick. If sellers haven’t retaken control in obvious fashion by 10:15, then perhaps a bigger bounce is underway to 749’00 or 821’00. A bigger, bear market, temporary correction.[/pay]