Market Wrap

[pay]Pattern notes.
Monday’s steady progression of lower lows came from the general absence of buyers pushing back. We had just finished discussing this point in the chartroom near the 3:30 lows, when two things happened in somewhat rapid succession. First, the 858’25 bounce limit was recovered 2 points off the low, which was 1 point off the target. And then a surge reversed back up to the 873’75 noon hour highs.

Three hours of selling retraced by 10 minutes of squeezing. But now there are two interesting points about the surge. First, its gain has yet to extend any higher thus far 90 minutes into the overnight Globex session. And it has yet to be retraced. The optimism might be leveraged into something more meaningful by gapping up above 880’00. Otherwise it appears that Monday’s last-minute surge already borrowed the discounted value of what patient buyers were saving up to unleash Tuesday.

One other observation about Monday’s surge is an observation about its close, which was under Thursday’s close. The controversy surrounding Friday’s session is whether its intraday recovery represented any sort of bottom. Again, absent a gap up Tuesday above 880’00, no.

Indicators and Internals.
Technicals at Monday’s low don’t indicate anything specific in store for Tuesday, nor do readings at the last-minute surge’s high. Much more interesting is that just over two times more NYSE up volume than down volume was able to produce nearly three times more declining issues than advancers. This reflects a credibility to the selling pressure which suggests buyers stayed away for a reason – they didn’t stand a chance unless they ambushed sellers when they did.

Tuesday’s opportunities.
The reaction to Goldman’s (GS) earnings might be able to trigger that gap up above 880’00, if the morning’s two econ reports don’t help or interfere. Follow-through would be hard earned, considering traditional anxiousness ahead of the afternoon’s 2:15 FOMC interest rate announcement. Not that I expect one thing or another from GS’s earnings – the stock does not appear to have bottomed, at least not permanently, but an initial bounce can’t be ruled out. More important to the broader market is the unfinished business below, and the lack of enthusiasm for resolving it in time to allow a year-end rally, or simply to increase the distance from its magnetic attraction.[/pay]

[pay]Pattern notes.
Friday’s drop was saved by the open’s ability to quickly recover above 850’00. This line in the sand was defined by overnight lows, and although it held a touch as resistance during the first minute, its recovery three minutes later never looked back. Having held 850’000 as support, buyers finished absorbing fallout from the bailout bill and the Madoff scandal.

The weekend’s impending illiquidity could have cut either way, and it would have cut the other way, had the open not immediately recovered 850’00. That other way was a path to retest the overnight low’s “new Globex trend extreme” at 828’75, which was itself a path to retest the prior week’s lows at 813’00. And there’s no reason to retest the prior week’s lows unless the entire Thanksgiving rally were unwinding.

It’s not that gapping down 25 points from Thursday’s close expended too much energy for following-through. It’s that gapping down 38.2% of the way back to Thursday’s close robbed sellers of too much traction for following-through. That was near enough to Thursday’s close for its retest to be more attractive. For now. Friday’s recovery was enabled by the weekend’s impending illiquidity, and that couldn’t be less relevant now.

When the weekend’s illiquidity was just minutes away, the focus was on a probe of new session highs. The probe failed, but not enough to undercut the optimism that was holding up prices. So optimism also goosed S&P futures an additional 5 points after the cash session close. The sentiment may live through the weekend to gap up Monday’s open back towards last week’s highs. Some degree of follow-through would be likely, but it may be too late for this to evolve into a Santa Claus rally. Santa might have other plans.

Indicators and Internals.
The Friday Factor triggers rarely, but it forms when both the first and last 15-minute windows are biased in the same direction as each other. Friday’s were both biased up, which makes Monday’s first 15 minutes likely to repeat. Monday’s open could gap down, but a comparison 15 minutes is likely to reflect an upward bias. A gap down could bounce from 878’50 where the cash session closed, back up to the last print at 884’75. Or a gap up could probe last week’s range optimistically, and then lose traction. The setup’s point is to undermine initial sentiment as being extreme.

Monday’s opportunities.
Almost any attempt to resume Friday’s pre-open decline would get a benefit of the doubt. Two outstanding objectives are to retest the open’s gap down to 849’00 and the overnight low at 828’75. Under 876’50, confirmed under 871’50, would signal a move underway down to these levels.

Friday’s optimism might extend higher to 898’00, but buyers start gaining traction above 900’00, and above 906’00 almost triggers a new rally leg up to 933’00 and 940’00.

I don’t expect Tuesday afternoon’s FOMC decision to influence Monday’s price action much. Especially most of the air in the room is being sucked out by the potential for massive bankruptcy filings by automakers. Monday’s econ calendar isn’t very light anyway.[/pay]

[pay]Pattern notes.
It took awhile for Thursday’s ranging to finally capitulate. Despite the mid-day teasing at potential probes of higher highs, there wasn’t much doubt which way the pattern would resolve eventually. The morning and overnight lows were overly-optimistic, equally optimistic to every prior bounce that had retraced entirely.

The same can be said for the week on whole. The capitulation has taken awhile to arrive. The mid-week teasing at higher highs never outweighed the expected eventual resolution. And last week’s lows were overly-optimistic.

Thursday afternoon’s drop left a target in-play at 865’00. That allowed its magnetic attraction to help resume the decline Friday. Had the target been met Thursday, then it might have served as a bottom. Well, it is being met Thursday – after the close, in a gap down on BAC layoff news. In fact, 858’50 is being tested.

Friday’s session is still vulnerable to open by repeating Thursday afternoon’s drop, which essentially means down towards 850’00 near the open. Gapping down there and extending under 846’50 could slow the next 11 points of descent down to 836’50, but any lower could reach under 800’00 before the close.

The bullish scenario would recover above 876’50, and extend higher to 887’50-890’00. That would either delay a bigger day of reckoning, or give buyers a chance to gain traction for resuming the rally. Good luck with that.

Indicators and Internals.
Thursday’s potential for a short-squeeze was undermined by several factors. One was3-minute  RSI’s shallow bounce when S&Ps first tried bottoming near session lows. By the time RSI could dip again from positive territory, it was too late for a short-squeeze to form. Relentlessly oversold might make a market vulnerable to bouncing, but not sustainably, and meanwhile more vulnerable to resuming the decline at an accelerated pace. Things aren’t looking any better as the Globex open ticks lower…

Friday’s opportunities.
Fridays tend to extend the open’s trending well past the noon hour. If the open gaps down sharply but doesn’t extend lower, then the balance of the morning could bounce as sharply or more. But first things, first…

S&Ps are probing lower lows now,90 minutes past the Globex open. There is room several ticks lower to test 857’75 before targeting 850’00 down to nearly 846’50. But back above 861’00-862’00 would rob sellers of their traction, and at least extend the ranging back up to 865’00.

An auto bailout bill vote possible overnight. Two econ reports at pre-open and another two after the open. Then a weekend of illiquidity ahead. All being prefaced by a 15-point follow-through from a 25-point loss. Should be an interesting session.[/pay]

[pay]Pattern notes.
Wednesday morning’s distribution probably wasn’t intended for so limited a purpose as simply to attack Tuesday afternoon’s lows. But that’s all Wednesday morning’s sellers got for their efforts. At least, so far. A gap up, probes of higher highs, and then a brief mid-afternoon visit to prior lows testing 885’00.

The low didn’t even touch Tuesday’s low, and Wednesday’s last 90 minutes bounced 17 points to 902’00. This last-minute bounce came after several other probes above 895’00 each failed. The 902’00 test was eventually retraced back under 895’00 just like the earlier probes, but not until after the Globex open. Waiting through the cash session close prevented sellers from regaining traction, and made it more difficult for them to do so.

No, opening weakness down to 889’00 could still recovery nicely. Gapping down under the 885’00-887’00 area would allow a brief, small bounce before extending down further. But a gap up above the last-minute 902’00 high would put into play a retest of the week’s highs up to the 920’00 area – and depending upon the timing, either a 15-20 point surge or a 35-40 point purge.

Indicators and Internals.
MACD & RSI were only modestly improved at Wednesday afternoon’s lows. Only modestly, if that. They were oversold deeply and long enough to account for the late 17-point rally. But too oversold for too long to account for a sustainable recovery. It’s not that Wednesday’s lows require retesting – that simply wasn’t a compelling bottom, and now a corrective bounce may have ended.

Thursday’s opportunities.
Unless buyers are productive overnight, we’ll monitor the open for whether sellers are renewing the prior afternoon’s effort. Their reward seems too brief and shallow for that morning’s effort, so this extra delay should be rewarded by making the drop that much more substantial – back to last week’s lows before the weekend? If sellers aren’t obviously in control after the pre-open econ reports, we’ll consider parameters for going long.

Note: The December contract still trades as front-month Wednesday night. The difference from the March contract is only 1-2 ticks, more often only 1 tick. [/pay]

[pay]Pattern notes.
Monday’s close predicted equilibrium through at least Tuesday morning. Its influence lasted through the noon hour. The afternoon’s drop to new session lows at 885’00 was a singular leg. It was retraced by a single bounce up to 900’00 where almost any higher would have triggered a short-squeeze. Instead buyers balked, and the bounce was retraced back down to session lows.

The market couldn’t dig its way out of negative territory. The rally reached almost high enough, at the right time. And the rally’s opposition was ineffectual sellers who could only retest the low but not break it. Buyers can still retake control, but not meekly.

Gapping up above Tuesday afternoon’s 900’00 high would favor buyers, confirmed above 904’00. I would give this a benefit of the doubt for resuming the bear market bounce up to 933’00 and 940’00. Gapping above 904’00 would leave less upside on the table, but it would have more momentum behind it, making a more compelling long-entry.

There isn’t much required of sellers to control Wednesday’s session. They need only to extend the afternoon’s decline under 886’50 without any further delay. The gap back to Friday’s close in the low 870‘s would be targeted initially, probably down to 868’50. But since Monday and Tuesday never extended meaningfully, filling Friday’s gap already would suggest a retest soon of Friday’s low.

Indicators and Internals.
Both 1-minute and 3-minute MACD & RSI diverged positively into the afternoon’s retest of session lows. Each had already gotten overbought in the interim. While this setup tends to resolve up, that’s more often the case when resolving in the same session. Regardless, its resolution should begin by gapping either above a relative high or under a relative low.

Wednesday’s opportunities.
Gapping down a little would resume Tuesday afternoon’s decline and its target 20-23 points lower. Gapping up a little or a lot would still find plenty of resistance above to slow or stop it. The better recovery attempt would gap up and extend higher with little if any delay – the goal being to create a wide buffer to absorb a pullback. So the easier it is to buy a strong open Wednesday, the less attractive it is. [/pay]