Market Wrap

[pay]Pattern notes.
It took a few hours after yesterday’s cash session close, but S&Ps dropped to new lows and have continued falling overnight. As was suspected, the 774’00 target wasn’t recognized as support on the way down, but did get a work out as resistance before resuming the decline – the cash session might enjoy the exercise as well.

Also as was suspected, the week’s earlier price action has bled into expiration. This introduces a vulnerability to trending sharply. Not a requirement, but a vulnerability. Whatever the resolution, the character of an expiration Friday tends to be repeated the following Monday. And big money probably isn’t considering the impending two days of illiquidity as reasons to buy today.

Indicators and Internals.
The 3-minute RSI has largely avoided becoming oversold overnight while price has continued dropping. This would be constructive to a recovery if it were an intraday occurrence. In any case, it does not reflect accumulation that might convert a bounce into something more substantial.

Friday’s opportunities.
Currently a 5-point bounce off of 764’25 is deciding whether to extend back above 770’00 to revisit yesterday’s 774’00 target as resistance. Interim resistance at 771’25 could derail the attempt prematurely. Maintaining a break back under 767’25 would suggest the decline is already resuming, confirmed under 765’25, and next targeting 756’00.

Any lower than that would target new lows, as the Dow has already done (why should it get all the fun?). CPI is at 8:30, and psychologically perhaps the longest weekend ever is at 4:00.[/pay]

[pay]Pattern notes.
Sellers might have lost traction Wednesday if the close was not under Tuesday’s 787’00 prior low. Price ranged very narrowly just above Tuesday’s prior lows, which the cash session close barely managed to hold. This seemed somewhat dubious since buyers had failed to hold any relevant level during any relevant time intraday. So a 9-point plunge moments later down to 776’50 made much more sense.

The entire drop has been retraced overnight back up to Wednesday’s last relative high at 790’00. Gapping up above it Thursday would reject the last-minute dive. Gapping open in the direction opposite from trending’s direction also fulfills the setup that triggers a session-long rally. This instance of the setup might be less reliable here because the last-minute trending happened after the cash session and not intraday.

In any case, no close Wednesday rejected Tuesday’s breakout close. So any bounce would be corrective, perhaps only to absorb Friday’s expiration, and no more lasting. Expiration day could tilt down sharply if Thursday offers on tepid gains, tepid losses, or a rejected rally. Only one template offers a solid chance to reverse the decline’s near-term momentum: a rally intraday that maintains its relative gains on a closing basis.

Indicators and Internals.
Neither the 1-minute nor 3-minute MACD & RSI made a bullish setup at Wednesday’s 776’50 last-minute low. Not after the cash session close first plunged, nor on its retest one hour later. But each is starting to diverge negatively as the overnight rally tests yesterday’s last relative high up to 790’00. A gap up would be a gap up, but technicals don’t speak well of the current effort, and there is unfinished business back at yesterday’s low.

Thursday’s opportunities.
Wednesday’s low stopped 4 points short of the 774’00 next lower target. The last-minute plunge came within 3 points. A retest of the post-close low would easily fulfill the target, assuming a retest is even offered. If so, we should be sensitive to the possibility of temporarily bottoming there, considering the often unpredictable influences of expiration. Extending the overnight bounce might reach 808’00-809’00 before capitulating. In either case, the decline’s next major target would be 756’00, and under 743’00 would point significantly lower.

Thursday’s heavy economic calendar has two pre-open items at 8:30, and two post-open items at 10:00. That is ample opportunity to offer volatility that unsettles any initial trending attempt. Once these events become history, the market can return to digesting the sweeping fiscal changes, and to digesting how poorly that digestion has been going. [/pay]

[pay]Pattern notes.
Rumors of the market’s revival were exaggerated. The origin of Thanksgiving’s rally always required it to be retested, regardless of how high the interim bounce, and regardless how long. So, after all the advance billing for the long-awaited retest of November’s low, Tuesday’s drop may have been the salvo that sinks the battleship. But the ship isn’t yet sunk.

The 799’00 and 792’00 targets haven’t been in-play as long, but they were the products of weeks-old patterns nonetheless. Gapping down to fulfill them both Tuesday satisfied a lot of selling pressure that was weeks-old. They weren’t recovered through the close, so the decline remains likelier than not to extend down. Perhaps the only way to avoid this would be to gap up above Tuesday’s 797’00-799’00 highs, launching a rally into Friday morning.

Otherwise, with a bounce limit overnight of 792’00 or 795’00, the remaining question is just how the decline resumes. Wednesday’s open can simply start sliding towards its 774’00 target, or a slide Tuesday night can deposit the market there. In the latter case, the balance of the morning could repeat Tuesday’s narrow range until the afternoon’s FOMC Minutes.

Indicators and Internals.
S&Ps fell through the cash session’s close, and technicals deteriorated along with price. So far a bounce overnight has touched 791’00 where technicals have already been diverging negatively. Their alignments at the bounce’s low suggests the bounce is doomed to failure, as the low requires at least a retest.

Wednesday’s opportunities.
The 2:00pm FOMC Minutes might still precipitate enough controversy to generate volattility before and after its announcement. The economic calendar is pretty busy otherwise before the open. In case of another trading range, it probably wouldn’t be as narrow as Tuesday. But a big gap down would be just as likely to form the morning’s low. In case of gapping up above Tuesday’s highs, after Tuesday’s last leg was down, a session-long rally would be indicated. And more important in this scenario is that a bigger multi-session bounce would be underway. [/pay]

[pay]Pattern notes.
That was quick, but unavoidable. Now let’s see if it sticks. Thursday’s last-hour surge was doomed to failure, for having originated after the last hour began and after the last hour had already printed new session lows. Monday’s Globex session (no cash session on Washington’s Birthday) gapped down Sunday night and extended down to 810’00. The balance of the session firmed nearly 9 points until the last two hours dropped to 808’25.

This is Thursday’s pivotal low, the low prior to the 805’50 actual low. It is obligatory support and often produces an obligatory bounce. But just touching the pivotal low all but ensures eventually touching the actual low, whether only to probe it or to break it as part of a downleg tumbling lower. This pivotal low’s touch hasn’t yet happened intraday, which dilutes the requirement somewhat. But Thursday’s last-hour lows are due a retest nonetheless.

Retesting Thursday’s low hasn’t been the market’s only requirement. There’s a long-standing expectation for these lows to give way to another downleg targeting last year’s lows. The past several weeks’ repeated attempts to break lower have chipped away at support, and each new try has had the same likelihood as the last. If the current attempt fails, then the next attempt would also be likely to break lower.

If the current attempt fails, then one clue would have been the S&Ps relative performance to the Dow. While the 500-component S&P 500 has been ranging widely, it has also been ranging sideways. The 30-component Dow Industrials average has been trending down. Being exclusively “blue chip,” the Dow is a better representation of bigger instutional thinking, and that thinking has been defensive. This is potentially bullish from a contrarian perspective.

The 100-component NDX-100 is more heavily-laden with technology issues, and its outperformance reflects a speculative sentiment. This would be bullish, too, if it were occurring while S&Ps were actually trending down. Instead, the speculative sentiment has been rewarded already, and its vulnerability to profit-taking might put downward pressure on the broader market. NDX could still save the day by holding a retest of its own prior lows, saving S&Ps from freefall. But any relief, no matter the duration, would not be durable.

All of which relies upon actually extending Monday’s break into this week’s regular trading hours. An obligatory bounce might gain traction overnight if 814’00-816’50 doesn’t push price back down. I will update comments overnight as market conditions warrant. But the plan is generally to find resistance and timing to short in anticipation of a bigger slide Tuesday.

Indicators and Internals.
MACD & RSI diverged positively ahead of Monday morning’s 11:30 Globex close, at least 3 points before the ultimate low. There wasn’t a requirement for a bounce, but the pivotal low’s obligatory support should resolve it anyway.

Tuesday’s opportunities.
A couple of econ reports due are nothing compared to the stimulus bill signing in Denver, a growing focus on the next major funding packages, and now the automakers. My favored scenario is a morning drop that bounces from either 799’00 or 790’00, and then an afternoon drop that starts making its way towards 774’00. We may shift gears and look for a bigger and longer bounce, but not for a new upleg.[/pay]

[pay]Pattern notes.
Was it, or wasn’t it? The open’s gap down signaled a session-long decline, and its influence certainly seemed effective by converting a post-open 17-point bounce into a 20-point drop to new session lows. The last-hour’s 31-point surge, being entirely a product of the last hour, probably doesn’t have any relationship to the session-long decline signal. The signal was unbeatable, except by a move whose origin already dooms it to failure.

The last-hour surge also saved the day from trading exclusively in negative territory, recovering back to the resistance of Wednesday’s prior highs. The last-hour’s expended buying pressure might be missed just when it is needed most.

A break above prior highs Friday would therefore require fresh buying. And fresh buying would be obvious by gapping and/or spiking up. There is room up to 838’50 before buyers show they did gain traction Thursday – being a Friday, holding any opening gain could extend higher through the noon hour. Also for being a Friday, not maintaining an immediate gain would kick-start a downleg.

But no extra gain at all is required. The surge’s 836’75 high was a 61.8% swing from the 825’00 mid-day bounce high. That’s a false break measurement. Unless exceeded through a relevant timing window – e.g. Friday’s open – the next trending will be intent upon retracing back to 825’00, where there isn’t much room any lower before signaling the decline’s resumption.

Indicators and Internals.
MACD & RSI had started diverging positively into Thursday’s low. They started diverging negatively into the last-hour surge, but not until well after 3:30 when the indicators are misleading or irrelevant. The surge’s higher highs took RSI back up, but MACD was not confirming.

Friday’s opportunities.
Since the most recent price action already trended in the direction of prior highs, gapping up above prior highs won’t signal a session-long rally. And being a Friday, a session-long anything tends to print its extreme by mid-afternoon. If sellers get an early start, they might have a chance at breaking under 821’00-825’00 where the 798’00 and 792’00 targets would be reinstated. Consumer Sentiment is due at 9:55, nearly 30 minutes after the open, timing that tends often either to accelerate or to reverse any initial trending underway.[/pay]