Market Wrap

[pay]Pattern notes.
Wednesday afternoon’s drop from its 876’00 high was unable to break under 862’50. More than a retracement, its break would have triggered a downleg. But it was only pierced momentarily, similar to earlier tests of 857’00 and 862’50 (prior to the FOMC news) that also held as support.

The session’s last half-hour reacted back to 872’00. Being only a reaction, its purpose was to refuel sellers. Any credible attempt to extend higher Thursday morning is all but required to begin by gapping up. Consequently, if the open is not gapping up, it’s probably because the open is sliding or gapping down.

And since Wednesday’s last move was a bounce, a bounce back to a relevant level (872’00), a session-long decline can be signaled by gapping under the last relative low of 862’50 (really 861’25, but that was a test of 862’50). This signal isn’t required to trigger, and simply sliding at the open would be more likely to recover from testing the last relative low.

In case of the open gapping up to give buyers traction, or in case of any other valid buy signal, a detour back up to January’s highs would become likely before returning to last year’s lows. That’s not yet signaled, but Thursday’s price action could determine the next sizable move.

Indicators and Internals.
RSI refused to become oversold throughout Wednesday’s 15-point drop from its 876’00 high. The indicator found a floor that was decidedly above being oversold. While oversold conditions do make bounces likelier, oversold conditions aren’t reached unless selling pressure is increasing. The afternoon’s steadily dropping price was not the product of increased selling pressure, and that’s why Wednesday’s last half-hour bounced. The steady bounce also failed to turn overbought, making it less sustainable, unless followed by a gap up.

Thursday’s opportunities.
Jobless Claims before the open and New Home Sales afterwards tend to incite a reaction. The FOMC decision proved once again to be losing its relevance, and the reaction to the so-called stimulus package proved the House’s vote was never much in doubt. With so much that was laying in the market’s path now moving into its rearview mirror, a trending session becomes more likely.[/pay]

[pay]Pattern notes.
The market still had room for a “last gasp” rally effort despite Tuesday’s ineffectual optimism. The gap open and entire session spent in positive territory meant that sellers weren’t ready to step in. And the entire session spent in positive territory also meant there was no break under a prior low to give sellers traction.

The market was still in the orbit of Monday’s 850’00 high, and its retest was likely to include the outstanding 852’00 target. These were met by 6:30pm, surging 11-12 points from the cash session close. A consolidation there has extended higher overnight to test 860’00.

The nearby chart depicts all price action since last year’s low. The dashed line that is highlighted green represents the overnight highs. S&Ps would gap up above the past two weeks’ prior highs, and run into natural resistance at higher prior lows. We’ll be looking to sell this strength, perhaps only for a pullback to 850’00-852’00, perhaps for much more. An outstanding gap back to 869’00 might also figure in the picture, but at this point no price action suggests that a runaway rally is likely.

Indicators and Internals.
The one-hour old 860’25 high was just retested while both 1-minute and 3-minute RSI either made lower highs or diverged negatively.

Wednesday’s opportunities.
The negative divergence described above would trigger a pullback under 857’00 targeting 851’50. Bounces would need to hold any test of 859’50. If the pullback this signals does materialize, its resolution should be a recovery to higher highs, potentially back to Jan 13’s 869’00 gap. Anxiousness ahead of the afternoon’s 2:00 FOMC announcement should barely be large enough to inhibit the opening surge from extending up, but might also motivate its pullback to extend down. [/pay]

[pay]Pattern notes.
Monday’s gap up above 831’50 put into play 850’00-852’00. Does it matter the rally peaked 2 ticks short? Yes, and no.

YES. It matters so long as S&Ps are still within the target’s orbit. Monday’s retracement didn’t even break into negative territory. There is still potential for probing Monday’s high. Gapping up above last week’s 838’00 prior highs would put the retest back into play. Just opening flat would be likely to range sideways, but that would also include a retest of Monday’s high.

NO. Stopping 2 ticks short of 850’00-852’00 does NOT matter otherwise. The close under last week’s 838’00 prior highs indicates that buyers gained no traction. The door remains open to triggering another setup that puts 850’00-852’00 back into play – in this case, gapping back above 838’00 – but that setup must still be triggered. We’ll look at the bullish picture if 850’00-852’00 is exceeded.

Any attraction up to 850’00-852’00 becomes moot if Tuesday’s open were to gap down under 825’00, and extend and/or remain under 821’00 through the opening sequence. A break under 809’00-811’00 is still needed to officially signal a new downleg underway, but that should be only a formality after Sunday night’s dip there.

Indicators and Internals.
Oversold 1-minute RSI at Monday afternoon’s low helped to predict the gap back to Friday’s close would hold its test. Oversold 3-minute RSI improved one bar earlier to allow the bounce room to extend. But buyers never gained traction on that extension.

Tuesday’s opportunities.
Retail sales data before the open and Consumer Confidence afterwards will help to keep alive volatility. Although the FOMC meeting starts Tuesday, it shouldn’t inhibit price action because its announcement isn’t due until Wednesday afternoon. While gapping open either way would be predictive of one direction or the other, not gapping also carries specific implications.[/pay]

[pay]Pattern notes.
Last week was one day short, but that was long enough to establish a new tradition of last-minute moves (highlights on the nearby chart). Perhaps the first instance was Tuesday’s 4:00pm dip and bounce. This was followed by Wednesday’s 10:27am sudden slide reversing a gap up back down to Tuesday’s low. Thursday’s opening gap down waited equally long before finally resuming its drop.

Friday’s close kept with tradition by dropping sharply at 3:58pm. With 2 minutes remaining in the session, the last hour’s consolidation around and above 825’00 had firmed back to the 831’25 bounce target. So it seemed unlikely that 825’00 would hold. But the last-minute drop finished under it.

This difference of only several points may not seem very relevant – that would be the case if Monday’s open gaps up 10 points. Since Thursday’s open and close under 825’00 had prevented buyers from gaining traction, so does Friday’s open and close under 825’00. But no more of this last-minute tradition thing, okay?

Another tradition created last week that’s soon to end is the inside day. Wednesday’s session ranged within Tuesday’s, and Thursday’s session ranged within both, as did Friday’s, and volume declined throughout. Basing would have probed lower lows intraday and recovered. This is not basing. Lower lows have not been probed during regular trading hours, creating unfinished business below, which meanwhile inhibits rally attempts and attracts price down.

Indicators and Internals.
3-minute RSI diverged negatively into Friday afternoon’s highs. The eventual 15-point drop fell back into the mid-day consolidation, but retraced only 38.2% of it. That’s not pessimistic enough to reflect the negative divergence that produced it. Unless rejected immediately Monday by gapping back to the high, the reaction hasn’t ended.

Monday’s opportunities.
This is one of the few Monday’s whose economic calendar actually has items on it. They’re both at 10:00 – Home Sales and LEI – timing that tends either to accelerate or to reverse any initial trading underway. There’s an FOMC interest rate announcement Wednesday that might seem too far off to matter already, but Monday’s data could inform it.

If Monday’s open isn’t gapping down under 819’00, then it is probably gapping up into a detour with potential up to 850’00-852’00. Gapping down is only half the battle for sellers, who must also break under 809’00-811’00 to put into play 789’50 and then 771’00-772’00.[/pay]

[pay]Pattern notes.
Thursday’s close narrowly avoided recovering the 825’00 level whose opening break confirmed the market’s bearishness. An overnight drop is probing the 808’00 level that held back Wednesday and Thursday afternoons’ sellers. The 801’25 overnight low suggests that 808’00 will be probed intraday, but just when that happens could mean all the difference in the world.

So long as bounces hold any brief and modest test of 811’00 as resistance, we’ll look for the open to break support. And under 807’00 again makes the break likely to extend down instead of continue consolidating. That’s bad news on a Friday: starting off under prior lows, with lower targets outstanding, and two days of illiquidity fast-approaching.

Indicators and Internals.
The lowest oversold indicator overnight did not accompany the lowest price bar, so there is no requirement to retest the overnight low other than for it being under the prior session’s range.

Friday’s opportunities.
Only one item highlights today’s econ calendar. Otherwise, quarterly and annual earnings hog the headlines. But the economic focus is left mostly to news from D.C., and that news isn’t being taken well. Assorted news due this morning might be able to change the overnight course in time to cast a new die for the rest of the day. Then the week would more likely trade out bouncing back to 820’00 and maybe 824’00. Otherwise, 789’50 and 771’00-772’00 are in-play. [/pay]