Market Wrap

[pay]Pattern notes.
Yesterday’s session could have spared a lot of heartache had the open simply gapped under Wednesday’s 751’25 low. But apparently sellers needed the refueling of a gap up, and one more failure at 774’00. The session wasn’t spent entirely in positive territory, so it didn’t qualify as “ineffectual optimism.” Besides, the last hour dove into negative territory, ending while in the process of testing 751’25.

Now this morning’s open is threatening to gap under 751’25, after probing it repeatedly overnight and then sliding back to the week’s lows at 740’50. The week’s pattern had already shown us there was no support between the two. I did expect the low to offer an obligatory bounce had it been met intraday, but gapping open down here could simply continue sliding.

“Sliding” might not be the right word for it. Sellers could come out of the proverbial woodwork with new lows printing on a Friday. There are two days of illiquidity ahead and a week’s worth of broken promises behind. A corrective bounce back up to yesterday’s lows at this point would only refuel sellers further – not that they need it after ranging sideways for four days. Unless 753’50-755’00 were recovered, this day looks down.

Indicators and Internals.
Both 1-minute and 3-minute RSI diverged positively simultaneously at the pre-open lows, and again on their retest. Buyers need to exploit that soon by bouncing back above 745’00 to test 749’00. Lower lows would instead ignore the positive divergence. One or two more instance of that would mean much bigger selling pressure than already seen overnight was coming down the pipeline.

Friday’s opportunities.
GDP at 8:30 doesn’t tend to influence price action much. It might start doing so for two reasons. One is to fill the void left by FOMC events (interest rate announcements, Minutes, Biege Book) that don’t have much meaning anymore. The other reason is that proposed debt loads are reaching levels that make their ratios to other measures more relevant. NAPM is due 15 minutes after the open, and then Consumer Sentiment before the first half hour has ended. Should be fun![/pay]

[pay]Pattern notes.
Wednesday afternoon’s recovery extended to new session highs probing 778’00-779’00. This area held a test previously at Monday’s open, which resolved poorly. Retesting it again may have chipped away at its resistance, and that will come in handy if it’s ever tested again. Meanwhile, however, the chipping proved to be ineffectual since its resolution was a negative close.
The close wasn’t just negative. It was nearly 20 points under the last hour’s high, new session highs that didn’t even print until the last hour. The reaction down fell back under the afternoon’s bias-up target and signal, and back under the prior three sessions’ highs, as is depicted in the nearby chart.

The chart also includes a purple uptrending support that has essentially defined the recovery from Monday’s low. If Wednesday’s 751’25 low is the trend’s “key” low (the low following Monday’s 739’75 actual low), then its break would signal a move to new lows underway. A drop could expend a lot of energy before actually touching Wednesday’s low, energy that might be sorely missed just when it is needed to break lower. An overnight bounce has only widened that margin.

A gap under 751’25 might be the only way to resume the decline before Thursday afternoon. Wednesday morning’s “pivotal” low (the low prior to the actual low) was later touched again, so an eventual test of 751’25 is required eventually. Break it, and the market should find little if any obligatory support to inhibit new lows, and nothing to prevent it.

As for turning bullish near-term, a gap above 771’00 would be compelling, and would need to extend above 774’00 without much delay. The corrective bounce this would trigger can refuel sellers up to the low 780′s, and produce a really strong downleg.

Indicators and Internals.
S&Ps continued dropping after the cash session close. There’s a bounce underway from there, but probably not a durable one, since both the 1-minute and 3-minute MACD & RSIs were printing their lowest oversolds into the price low.

Thursday’s opportunities.
Durable Goods and Jobless Claims at 8:30 precede the cash session open, then New Home Sales comes at 10:00. This is the first day all week that no one is scheduled to promise banks won’t be nationalized. It will be interesting to see how the sector performs without cheerleading, since their gains have helped to delay the broader decline’s resumption.[/pay]

[pay]Pattern notes.
Tuesday’s cash session gapped up, traded exclusively in positive territory, and trended higher throughout the day. Sentiment could not have been more optimistic, not without also gapping up above the prior afternoon’s highs and not filling the gap back to Monday’s close. Regardless, nothing about Tuesday’s session was pessimistic.

That’s not necessarily bullish. The day’s 30-point gain retraced all of Monday’s loss back to Friday’s close, which might seem productive. But Tuesday was an “inside day” (Monday’s range contained all of Tuesday’s price action). Buyers produced nothing on the chart that wasn’t already there, so their optimism was ineffectual.

Trending throughout an inside day isn’t necessarily bearish. The bearishness is a function of expending buying energy without refueling, and without achieving anything not previously produced. None of which amounts to being a sell signal, it only characterizes further buying pressure as also being ineffectual. A probe above Tuesday’s highs might extend into the 780’s, and it might levitate into Thursday morning. But a move to new lows should be underway by Wednesday or Thursday’s close.

Higher highs Wednesday and Thursday might gain traction for a little more than a bounce, and for a little longer than this week.  But not much on either score, probably only up to 810’00 or 825’00. That would help to refuel sellers for a bigger downleg. Speaking of which, if the decline resumes Wednesday, it should be obviously productive by Thursday (no third consecutive inside day), or else new lows could be delayed until next Tuesday.

Indicators and Internals.
3-minute RSI was almost at its highest overbought when Tuesday’s 774’75 high printed. The 1-minute RSI was already diverging negatively. Optimism must have been pretty thick, because the reaction down bounced off of the 768’50 sell signal. A dip one minute afte the cash session close also bounced, but only modestly, suggesting the optimism is tiring.

Wednesday’s opportunities.
A probe above Tuesday’s highs would begin gaining traction above 774’00. Its pattern would “only” target 780’00 and potentially also 787’00 (a retest of Sunday night’s high). But these levels have already been retested, so their retest again would be more likely to have higher targets in mind. A morning rally that isn’t derailed by early afternoon might be starting towards 810’00 or 821’00.

Under 768’50 has little if any relevant support above 755’00, so I would give its break a benefit of the doubt, but also a relatively tight stop. Assuming responsible risk control, these parameters are equally valid overnight, in the wake of Obama’s speech to Congress scheduled for Tuesday night.[/pay]

[pay]Pattern notes.
I was willing to turn bullish near-term had Sunday night’s open not behaved poorly. It did, briefly, until Citi’s news pushed price sharply higher. I was still willing to turn bullish near-term, had the reaction been maintained. It wasn’t, and I didn’t. The session-long decline attacked last year’s lows, with no reason to stop, let alone to recover.

When the influences of Friday’s expiration session had worn off, and Friday’s low had been retested, the market had a choice: bounce back into the range, or leave the range behind. It chose the latter. Bounces overnight have room up to 749’25-751’00 while still remaining on-track to probe new lows Tuesday. Above 752’00 would make a bigger bounce likely, and delay the inevitable probe of new lows.

The first day testing new lows won’t be this leg’s low. So, the first recovery attempt will be doomed to failure. Any recovery attempt this week would be suspicious.There is a growing likelihood for another 500+ point session loss, and delaying it with bounces would only refuel sellers for an even bigger, longer drop.

Indicators and Internals.
Including Monday’s last low, the intraday decline ignored three consecutive 3-minute RSI positive divergences. The last one’s timing might mitigate its significance somewhat. But the other two were pretty powerful, and the session was littered with broken supports. In other words, Monday’s sellers were motivated in ways that tend to precede bigger selling pressure coming down the pipeline. Delaying a bigger decline would mean the selling pressure had been diverted.

Tuesday’s opportunities.
Two retail sales reports are due pre-open. Consumer Confidence is reported 30 minutes after the open, timing that tends to accelerate or reverse trending already underway. Another thing that tends to affect trending is Congressional testimony by Fed Chairman Bernanke – got one of those two. The text of his opening remarks should be released shortly before Consumer Confidence numbers, so price action should be jumpy, and then get jumpier when the Q&A begins.[/pay]

[pay]Pattern notes.
One week ago I recall watching Sunday morning’s talking heads, and thinking, “this won’t be good.” Talk of nationalizing banks was everywhere, but it was a Republican’s support for the idea (Graham, SC) that made it seem all the more real. Sunday night’s Globex open dropped sharply, stayed down through Monday’s holiday, and extended lower through the week.

This weekend brings similar “news” of a proposed tax hike on the wealthy (i.e. employed) and on businesses (i.e. employers). This won’t be good. At least, it shouldn’t be, just as last week’s news shouldn’t have been good for the market. Last week I was prepared to turn bullish near-term had Sunday night’s open not responded poorly to that morning’s commentaries. It didn’t. Similarly, I am prepared to turn bullish near-term if tonight’s open doesn’t act very poorly. It might:

Friday’s lows satisfied one of the more meaningful targets at 756’00 for retesting November’s low. A late-afternoon rally back to session highs probed Thursday’s higher prior lows and even filled the gap back to Thursday’s 778’00-779’00 close. The entire session was spent in negative territory, but that might yet be proved an anomaly related to being the month’s option expiration day. The resistance of Thursday’s underbelly has been chipped away, so a gap up above Thursday’s 778’00-779’00 close could extend higher throughout the day.

It is true that the decline fulfilled some unfinished business below, and the afternoon’s bounce chipped away at resistance above. It is also true that the decline chipped away at support and the bounce neutralized magnetic attraction above. The winner of this debate can be determined by flipping a coin, or by noting that Friday’s close fell back under its morning’s highs, and back under Thursday’s lows.

Semi-interestingly, Friday’s low actually equated to the price of December 2008’s contract that accompanied November 20’s cash session close. And I was seated next to Steve Jobs in a posh San Francisco eatery in 1986. So, what? Exactly. So, what. Friday’s late-afternoon low was kind of neat, but its meaningfulness was arbitrary. And therefore, so was the afternoon’s recovery attempt.

Indicators and Internals.
1-minute MACD & RSI improved into Friday’s low. No other period’s MACD & RSI did so well. The 3-minute RSI printed its lowest oversold on the bar prior to the price bar that printed the session low. This exception may suffice for marking intraday oversold, but not normally a sustainable low. The 3-minute RSI did diverge negatively at the late-afternoon high, and that reading has yet to be neutralized by another oversold.

Monday’s opportunities.
Trend lows just don’t happen on Fridays. Retests aren’t much more likely to hold on Fridays, but a retest Monday of Friday’s lows should lead either to a sharp break lower, or to a steep bounce. The resolution might not be obvious before Tuesday, because the characteristics of an expiration session tend to be duplicated or mirrored the following day. Friday gapped down, ranged sideways, and tested prior highs as resistance. Monday might gap down and range sideways, but test prior lows as support.

Strong sentiment doesn’t normally interfere with expirations like it did last week, so Monday might depart from Friday’s example. A gap up maintained above Friday’s 779’50 high would signal a session-long rally, unless the gap up were too ambitious and tried also to recover 797’00. Falling under 760’00-762’00 instead could help to resolve unfinished business below, or else lead to the next downleg targeting a probe under 700’00. [/pay]