Market Wrap

[pay]Pattern notes.
Sellers threw everything and the kitchen sink at Thursday’s market. The decline’s 693’50 target was not recovered, but all unfinished business below was resolved. And the lowest among them – Tuesday’s 681’50 new Globex trend extreme was still in the process of being tested at the close.

That doesn’t mean new business can’t be introduced. For example, gapping up in reaction to Friday’s Employment report would leave outstanding the gap back to Thursday’s close. This or a similar effort wouldn’t preclude a very satisfying rally to begin. But unfinished business below would inhibit it, and also speak to the durability of any such attempt – just as November’s unfinished business didn’t prevent a sizable rally, and its ultimate retracement.

Indicators and Internals.
RSI finally diverged positively into Thursday’s low as the 676’50 target was being met. The setup produced a 10-point bounce into the futures session’s close. This recovered above the morning’s low, but it was too late to be predictive, since the cash session’s close had barely recovered above the afternoon’s prior lows. It might have robbed sellers of near-term traction but buyers didn’t gain any, and 1-minute RSI was overbought at the close.

Friday’s opportunities.
The Employment Situation report is due at 8:30, and its reaction could be substantial, and temporary. I rarely condone holding short, and certainly wouldn’t consider it in an environment that is printing new lows, fulfilling all targets, awaiting a big econ report, in an otherwise fluid news environment. I will update overnight if any setups form. [/pay]

[pay]Pattern notes.
New session highs in the last hour have no excuse for not extending higher, let alone for reversing down. Well, there is one excuse: false breakout. The 723’75 high was probed by 1 tick before reversing back under its 720’00 pullback limit, triggering a plunge into the close.

The plunge stopped at 708’25 when the futures session closed, 4 points under levels that accompanied the cash session close. Therein lies the rally’s salvation. The cash session close almost retraced back under the open’s 710’50 high (circled on the nearby chart). Almost. The morning’s 713’00-714’50 highs failed to hold (also circled on the chart), and that’s not bullish. But failing to hold the open’s peak would have been definitive.

The proxy for closing under the open’s peak is to gap down under its reaction low. This happens to be the session’s 699’00 low, and it is under attack overnight. Gapping under Wednesday’s low is the first step; the second step is to extend down sharply to compensate for the delay. Objectives would be the gap back to Tuesday’s 695’25 and 689’50 close(s) and its 681’50 overnight low. A close back above the decline’s 693’50 target would continue to be constructive to forming a bottom.

High-profile econ reports due before the open could reverse the overnight losses pre-open. This remains possible because the cash session close held above the open’s peak. Even the futures session held above the 708’00 level that had been critical intraday – 708’00, which had held as resistance through every relevant timing window to undermine all other rally efforts. Recovering at the open would target at least a retest of Wednesday’s high, and potentially resume the rally. A bear market rally, instead of something more substantial that could develop if the unfinished business below were neutralized first.

Indicators and Internals.
Both 1-minute and 3-minute RSIs diverged simultaneously at 3:30 Wednesday when the last hour’s peak was being retested. Time was short, so justice was swift. Currently, RSIs have continued deteriorating into the overnight decline. Their simultaneous oversold reading just accompanied an attack on 700’00, and improving MACD helped to trigger an oversold bounce. But the simultaneous oversold RSI suggest the bounce will fail, keeping alive the potential for gapping down under Wednesday’s 699’00 low.

Thursday’s opportunities.
Jobless Claims may be higher profile than normal, with February’s Employment Situation report being one day away. If its reaction aids a recovery back above Wednesday’s 699’00 low then the balance of the session could range sideways while waiting for Friday’s report. A recovery above Wednesday’s 710’50 opening peak would at least target a retest of the 724’00 area. The afternoon will become vulnerable to ranging narrowly ahead of Friday’s report.[/pay]

[pay]Pattern notes.
The 693’50 target has been long-standing, first identified at November’s low. It was confirmed by being the target of several other major distribution patterns that had formed throughout the interim months. Its repeated testing as support Tuesday morning and the afternoon’s steep rally would have made a recovery credible.

But a recovery needed to stand the test of time – or, more precisely, timing – by extending up above 709’25 through 3:20-3:30. The penalty at this stage of the pattern was a same-day reversal to new lows. After the cash session close, lower lows fell to 688’75.

Lower lows are all but required Wednesday. A bottom setup might yet develop from the resulting price action. They don’t call it “Wreversal Wednesday” for nothing, if not for the weekday’s history of often reversing early trending. But meanwhile, any initial bouncing would not be credible unless it literally gaps up above Tuesday’s 709’25 high.

Indicators and Internals.
RSI deteriorated to the afternoon’s worst levels as the cash session came to a close. Technicals only continued deteriorating as the futures session drove price down sharply further. No unfinished business was left outstanding above.

Wednesday’s opportunities.
I don’t know of any administration officials scheduled to speak, and there hasn’t been any reason to suspect an intervention coming. A Rubin-esque tactic would be to let the market react poorly to ISM or to Beige Book – or after Thursday’s Jobless Claims – and then intervene so Friday’s Employment Situation could be greeted from (presumably) an optimistic bias. Those were the days. Meanwhile, having seen this market willing to punish Tuesday afternoon’s buyers for stopping short, I would expect any other bounce to also fail.[/pay]

[pay]Pattern notes.
The cash session closed high enough to foreclose upon remaining short through the close. S&Ps spiked up right before the futures close, ending above the afternoon’s 703’00 prior lows. Sellers would have been robbed of their traction had the cash session closed this way. The potential for bouncing was enhanced, but potential for maintaining the bounce was undermined. Almost doomed.

A bounce could have retested Monday’s 720’00 opening gap without giving buyers any meaningful traction. Monday’s opening gap could still be retested – we might even posture for its retest this morning. The bounce overnight ultimately peaked at 715’25, and currently a 10-point drop from there is trying to reverse back up. The status of that effort by the time of our Morning Market Tour could define the morning’s direction.

Yesterday afternoon’s price action mostly ranged sideways. Its resolution was vulnerable to resuming the decline, but only probed new lows under 700’00. And the new lows were in no way qualified to serve as a bottom. This might be an attempt to allow a soft landing at the 693’50 target’s test (assuming the target is even tested). It might also be a strategically located refueling effort to enable plunging through 693’50.

We’ll monitor and assess the possibility of either in real-time. But be prepared that a softer approach on the target could suddenly shift gears and accelerate down. Also be prepared that a steep intraday drop could still recover back above the target on a closing basis. And mostly be prepared for the potential – and temporary – upside of any intervention. For now, however, the trend remains down.

Indicators and Internals.
RSI diverged negatively at the overnight bounce’s first test of 715’25. Its retest several hours later hadn’t improved. The eventual 10-point drop saw rotating improvement among MACD & RSI around 706’00-707’00, which has so far produced a bounce probing 709’00. But technicals at the drop’s low didn’t indicate any durable bounce yet possible, and technicals are deteriorating on the bounce being attempted.

Tuesday’s opportunities.
This morning’s econ calendar offers several glimpses into the consumer, which might yield some strong opinions on the stimulus bill’s psychological impact. It’s probably too early to gauge its success or impediment. Having missed its opportunity yesterday to signal a crash, the decline’s early resumption this morning would have a better chance at holding a test of its 693’50 target. Delaying the decline’s resumption past this morning would make that resumption much likelier to have much lower targets on its mind. [/pay]

[pay]Pattern notes.
Friday’s gap down was retraced into the afternoon, back up to Thursday’s ~750’50 intraday lows. This leg’s degree and duration prevented one crash setup from forming, in that a session-long decline could have attracted new sellers. Ultimately the bounce was itself retraced to close 1 tick under the morning’s 733’00 low.

The cash session close was a couple of points higher around 735’00, but the pre-open low’s “new Globex trend extreme” at 729’50 was several points lower (dashed line on the bottom chart). Each will now compete for attention. Upon neutralizing the magnetic attraction of one, the other point’s attraction will become relatively stronger. Do the math. If a probe of either point is maintained through a relevant timing window, then its momentum could be unstoppable. Do the physics.

The near-term bullish case would recover from an early test of 729’50 – preferably not a shallow test, the scarier the better. Two consecutive weekly declines have expended a lot of selling pressure, while also fulfilling the required retest of last year’s lows. Almost any hesitation after probing lower lows could result in a massive short-squeeze and multi-session rally. Its mission would be to probe this year’s “higher prior lows” up to 800’00 or 821’00.

Its mission would, of course, be futile. Also futile would be a firm open Monday that struggles to recover above 740’00. Then Friday’s pre-open low takes over as the main attraction. The two consecutive weekly lower closes will have created more selling pressure than were expended. The prior week’s drop had already triggered a more substantial downleg underway. Friday afternoon’s retracement rejected the morning’s bounce, and confirmed Thursday’s narrow breakout close under Wednesday’s low.

Although one crash setup didn’t form, another is well on its way by closing negative in 9 of the past 10 sessions. The “Rubber Band” has been stretched so far that stretching it any further would snap prices lower. Not stretching the Rubber Band any further would snap prices back up. The setup is on the cusp of triggering, and a substantial drop would confirm it had already triggered.

Regardless of the near-term path, the eventual destination remains unchanged: sharply lower lows. An ugly open Sunday night would likely be on this path, until proved otherwise. A close back above 743’00-745’00 would trigger a “Gotcha!” setup’s bear market bounce. The alternative to triggering the Gotcha could be a close that is dozens of points lower. Or more.

Indicators and Internals.
Friday’s intraday bounce alleviated the morning’s oversold technical condition. It also helped to soften the indicators’ readings when the afternoon’s drop probed new session lows. The higher lows didn’t have enough time to enhance the vulnerability to rallying, not at this stage of the pattern. But a recovery would have left no unfnished business below.

Monday’s opportunities.
The econ calendar is normally empty when the week begins, but not today. One report pre-open at 8:30 is followed by two more 30 minutes after the open at 10:00. There are higher profile reports than these, and the balance of the week is littered with them. Much more relevant than any of them at this writing is Sunday night’s open. See you then.[/pay]