Market Wrap

[pay]Pattern notes.
I toyed with the idea of starting this post with, “Ladies & Gentlemen, start your engines.” Confirmation of a new downleg was denied when the market avoided a second consecutive lower close under Thursday’s breakout. Although not normally equivalent to being a buy signal, some things about this week (addressed below) make that possible, not certain. But “start your engines” should probably be reserved for a gap up above Thursday’s highs.

Friday’s action might have produced A bottom, not THE bottom. And it’s not a bottom at all if Monday’s open rejects Friday’s last-hour surge. That rejection could be defined as being almost anything less than extending the gain through Monday’s open. It would be official under ESz 770’00 and irrecoverable under 754’00. But it wouldn’t start to be a concern until failing to hold above 780’00.

Expiration may have exacerbated Friday’s last-hour rally, but expiration influences often influence the following week’s open. Then there is the oncoming seasonal bullishness of a holiday weekend. If refueling the surge needs a pullback any deeper than 780’00, that would start to suggest the surge had only refueled sellers. It would be very bearish not to exploit expiration follow-through and seasonal bullishness ahead.

Be mindful that Friday’s last hour was equally vulnerable both to dropping or to rallying 50 points. The repeated tests of Thursday’s low so late in the day were either chipping away at support, or else coiling for a short-squeeze. The drop was the surer bet, prevented only by news from the incoming administration. Prevented, or interrupted.

The rally was triggered by news of appointments to be proposed by the incoming administration. It wasn’t Geithner, Richardson or Summers specifically, but something firm for the markets to absorb. The market will grudgingly return to discounting the unknown if that information spigot suddenly runs dry, which we’ll know by Monday’s open pulling back too far. Otherwise, we’ll assume the market dodged a big bullet Friday. For now.

Indicators and Internals.
The last-hour surge gained 25 points on two higher highs despite overbought 3-minute RSI on the first high. The first 1-minute RSI divergence came at the cash session close to trigger a 12-point drop before futures closed. It’s difficult to consider the post-close pullback as being the fulfillment of earlier technical problems. The cash session open will need to gap up above Friday’s last-minute high if the rally can continue without paying this debt.

Monday’s opportunities.
A pullback has room down to 780’00 without threatening to invalidate Friday’s last-hour surge. Almost any lower – especially by gapping under 780’00 – would target 770’00 whose break would all but reject the rally, confirmed under 754’00. Monday’s first hour isn’t any less likely than Friday’s last hour to trade out flat. So a dip to 780’00 should probably be recovered aggressively overnight to avoid the rejection scenario. And if the “Ladies & Gentlemen, start your engines” scenario wants to announce its arrival appropriately, then the cash session should gap up above Thursday’s 816’00-821’00 high.[/pay]

[pay]Pattern notes.
Thursday afternoon’s slide to ESz 745’00 furthered the distance from a potential bottom around ESz 787’00. This doesn’t mean a bottom cannot form here. The original opportunity is out of reach, of course – not the parameter for 2-3 days of intraday sell-offs that each recover through the close, but the requirement for those recoveries to close back above 787’00.

In place would be a 2-3 day consolidation that probes 745’00 below and 780’00 above. This would preserve the template that sellers run out of steam in the sessions after 787’00 is met. It would also preserve the template that keeps optimism in-check and impossible to be confused as being “excessive.”

The shark circling around this sinking ship is a second consecutive lower close – under Thursday’s 745’00 low. Regardless of the break’s size, Thursday’s drop is still only one break under prior lows. It is still young and fragile. And vulnerable. Not vulnerable to reversing up, just vulnerable to not continuing down immediately. So, not closing under 745’00 Friday would be constructive to a potential bottom. Otherwise, look out below.

Indicators and Internals.
MACD & RSI diverged positively into Thursday’s 745’00 low. Three hours into the overnight Globex session produced a test of 759’00 where negative divergences have produced a pullback, ending any technical obligation.

Friday’s opportunities.
A higher high has room up to 762’00 just as normal fluctuation. Above 765’00 would target 780’00-782’00 so long as pullbacks then hold 758’00. Under 750’50 would instead target a retest of Thursday’s lows. The latter scenario would be healthier, if its test of Thursday’s low waited until Friday’s cash session open. Otherwise it would leave open a gap wanting to be filled. It would also help to recover the test by 10:15, because this being a Friday, initial trending would be likely to persist past the noon hour. So any hopes of a forming a bottom rely upon delaying a lower low or avoiding it without being too optimistic.[/pay]

[pay]Pattern notes.
We’re getting closer. To what, I don’t know. But we’re definitely getting closer. Thursday’s “V” bottom had required a retest, and Wednesday’s close was under it . Two “V” bottoms do not make a durable bottom, so an immediate rally overnight or at the open would be expected to fail from whatever heights it could reach. A bounce up to only ESz 816’50 or 821’75 would remain vulnerable to reversing down hard. Any higher would only provide another heartbreaking detour.

The near-term objective is to test lower lows down to ESz 787’00, and then hold. This area would satisfy sufficient selling pressure for a false break from the multi-week Descending Triangle. Short and shallow bounces would confirm that sellers had been flushed out. This sort of thing doesn’t form in a day or two.

If the next lower low is not going to start forming the low, then it is not going to hold very well at all. An optimistic bounce to refuel sellers wouldn’t even be on the menu. Instead there would be a capitulation leg worthy of a new label.  And it would likely start by gapping down sharply.

Wednesday’s close barely recovered above the 811’00 level that would have otherwise allowed for holding short without interruption. No matter. Globex gapped down to reject Wednesday’s last-tick recovery, and after bouncing to 813’00 there are new session lows testing 807’50. Another point lower would start looking ugly for tomorrow’s open.

Indicators and Internals.
MACD & RSI diverged positively repeatedly throughout Wednesday’s decline, suggesting that much bigger selling pressure was visible. And much bigger selling pressure arrived by the close. But I wonder. The 3-minute made higher lows along with the 1-minute, but not diverging positively, since the 3-minute never became oversold during the afternoon. If sellers barely broke a sweat, there may be much more selling pressure coming down the pipeline.
Thursday’s opportunities.
A big gap down Thursday might elicit yet another knee-jerk reaction, but the open’s gap would need to be filled. An overnight rally would need to produced a sizable gap up to avoid probing lower lows. Perhaps this is the new low that doesn’t immediately originate a new rally attempt. Econ reports at 8:30 and 10:00 might impact price action, but probably without influencing direction.[/pay]

[pay]Pattern notes.
Tuesday’s pre-open low had required a retest. The cash session finally spiked down to a new low at ESz 824’75 that satisfied this requirement. Before spiking down, the consolidation’s measurements suggested that a new downleg would develop from the low’s retest. But instead the pre-open low’s retest held, reversed up, and eventually recovered back to session highs.

The late surge gained about 33 points into the cash session close around 858’00, and about 11 points more to 869’00 before the Globex open. The cash session close was under the morning’s high, which precluded the session from being considered a Key Reversal. Otherwise, the open’s gap down in a downtrend, new trend low intraday, and positive close would have signaled a rally underway.

The futures session close did qualify the day as a Key Reversal. So, much depends upon whether the futures close is rejected at today’s cash session open. The Globex open gapped down enough to make that case, which is being reinforced by further weakness down to 848’00.

Undermining the case for a Key Reversal doesn’t necessarily mean sellers will regain the traction they lost Tuesday afternoon – traction that requires a sustained break under 847’00-848’00. That won’t be likely back above 858’00, which could extend up quickly to Tuesday’s last-minute 868’00 high, and then higher.

Indicators and Internals.
Overbought 3-minute RSI at Tuesday’s last-minute high came after the cash session close, so its retest is only likely, and not required. The Globex session’s gap down makes the retest less likely, but it will still serve as a magnetic attraction if price can return to within its orbit. The overnight low was just probed, and sustaining a break under it would make the prior session’s high even less likely to be retested.

Wednesday’s opportunities.
CPI and Housing Starts due at 8:30 are being preceded by a last-minute pessimistic dip to a new overnight low. This could be priming the pump for a favorable reaction that restarts yesterday’s late-afternoon surge. If not, and the reaction insstead extends down to new Globex lows under 847’00-848’00 that are maintained through the open, the we’ll look for the decline to resume. Then attention will shift to the FOMC Minutes scheduled for 2:00, and always good for a reaction.

Don’t forget to add your comments to Jen’s “Weekly Q” – this week’s will be posted later today. Also note in the blog’s right-hand column that the SPX/ES Spread will be published daily.[/pay]

[pay]Pattern notes.
Monday morning’s initial rally attempt was impressive, as impressive as it could be without buyers actually gaining traction. Much of the time up to 10:15 was spent challenging overnight highs and Friday’s cash session close. But those resistance levels held, with sufficient time remaining to fall back under relevant levels on relevant volume.

Throwing good money after bad, buyers repeated the cycle of attempting the impossible during an irrelevant timing window. When their time and money had reached the end, sellers easily stepped in to regain control with a dive back to session lows.

Monday’s pattern was a smaller representation of the market condition since last Thursday’s momentary new low. Buyers rushing in optimistically to avoid missing a low, too impatient to wait for the proof. Monday’s losses extended down overnight, and now this morning’s open is on-track to gap down sharply. Isn’t it apparent by now that true strength is not determined by the brevity of time spent at a low, or by the speed of its recovery?

There is serious work to be done down here, and lower at last Thursday’s low, and lower at targets required by the past two months’ Triangle patterns. A quick reversal from opening down – or recovering from overnight weakness to open higher – would only delay the inevitable and prolong it. Such rally attempts have been shorter and shallower, so perhaps finally this week will put those attempts aside and get on with the business of bottoming.

Indicators and Internals.
The overnight low so far is ESz 829’25 and its 3-minute RSI was oversold. Its reaction has already bounced back up to prior highs around 838’00 where 1-minute RSI is diverging negatively. The low’s retest is likely because of its oversold RSI, but not required because it occurred overnight. And its retest is likelier so long as tests of the 838’00 area prior highs aren’t recovered.

Tuesday’s opportunities.
Thursday’s “V” bottom around 817’00 always required a retest; no credible rally could begin without getting this done. If today is the day, then we’ll look for the character of that retest to determine whether another impetuous rally attempt will come of it, or not. The attempt would be signaled by the retest forming another “V” that reverses up quickly – its rally would be brief, but steep. A durable bottom might form from a slightly lower and certainly longer test of Thursday’s “V” but an extended break is still possible, and likely.[/pay]