Market Wrap

[pay]Pattern notes.
Friday’s session trended up from the opening tick. That characterizes the impression made by price action much better than it characterizes the price action, itself. Missing is any recognition of the open’s 15-point gap down, or the last hour’s 25-point drop. But much is forgiven by a filled gap, and few are in attendance for the last hour.

Okay, we’ve dispatched the session’s two darkest moments down the memory hole. That’s not just one, but two dramatic exceptions. And yet the picture still isn’t overtly bullish, because its close was back under Wednesday’s prior highs (red line on the nearby chart). So, despite converting a gap down into a net gain, and despite probing new relative highs, Friday’s close wasn’t a breakout. What if we just ignore Wednesday’s prior highs?

That leaves an Ascending Triangle (defined by black lines on the nearby chart). Actually it’s a complex triangle, since the pattern develops fully under the prior high (yellow highlighting), which tends to produce a final leg in the direction’s trend before the trend reverses direction. The event qualifies as a false breakout, but in this instance I prefer faux rally – rally, because the price closed higher each day, and faux because probes into of new highs is being rejected.

Indicators and Internals.
Fine. If we can’t build a bullish case above, let’s look below. The nearby chart depicts a Symmetrical Triangle formed from daily closing prices.Last Monday’s new low bottomed at the pattern’s 61.8% false breakout target. The rally from there would seem to confirm the breakout was false, but volume does just the opposite. False breakout or not, volume leading into Monday’s low should have exceeded the pattern’s average pace, but didn’t. And volume on last week’s rally only worsened.

Another thing bulls would like to ignore about Friday’s session is that MACD & RSI diverged negatively into session highs. Refer to the first chart to see where RSI fell short. The divergence has already been productive, but the indicator didn’t seem impressed.

Monday’s opportunities.
The discussion above pokes holes in the bullishness of last week’s rally. That’s not entirely fair since last week’s highs consolidated just under prior relative highs, where the decline’s last downleg originated. If that was the market being constructively pessimistic, then Monday’s open should gap up above those prior highs – from ESz 987’50 to 989’00 – and extend higher. That’s a 22-23 point gain from Friday’s close. A break under 950’00-951’00 would trend down. A gap or immediate break might not be enough, since two econ reports due at 10:00 might try to accelerate or reverse any initial trending.[/pay]

[pay]Pattern notes.
What to make of Thursday’s roller coaster ride? Not that the analogy is unique lately. But this session cycled much more cleanly than most in moving from one end of the extreme back to the other end. The mood got started with Wednesday’s last-hour round trip, continued with Thursday morning’s complete retracement of the overnight recovery, a recovery that was repeated into Thursday’s close. The pattern stayed true to its roller coaster model by including a couple of false moves in between others.

In the end, Thursday was an inside day whose range was contained entirely by Wednesday’s price action. Had the late-afternoon 22-point drop from ESz 957’00 stayed down, then the session’s pessimistic bias could have been considered contrary to the market’s true motives. But the drop to 935’00 was retraced 30 points including a very last minute spike. So not only was the final bias optimistic, it was optimistic with a vengeance.

The late-afternoon drop interrupted the roller coaster’s early-afternoon rally. Before then, S&Ps were on-track to break above 957’00, with time to extend higher and avoid the inside day label. Then the optimism would have been effectual. The last-minute spike’s slope above 957’00 actually underscores the ineffectual optimism, which can be offset only by maintaining a gapping up Friday above prior highs.

Indicators and Internals.
RSI ranged widely overnight ahead of Thursday’s session, predicting trending and volatility, and delivering. Now the 3-minute RSI is avoiding oversold territory while S&Ps drop at the overnight open. Any trending intraday will be tough to reverse if it ever gets started.

Friday’s opportunities.
It’s not surprising to find three hours into the overnight Globex session an 11-point pullback is testing 950’00 as support. There’s room down to 945’00 before starting to signal that sellers are actually gaining traction, and not just correcting Thursday’s last-minute surge. This being a Friday, the open sequence’s eventual direction, if any, is likely to persist well past the noon hour. But, oh, that opening sequence. Two reports due at 8:30 are followed by two at 9:45 and at 10:00. Even a gap up above prior highs can’t be relied upon to hold its gain and signal a rally.[/pay]

[pay]Pattern notes.
The latter stages of Tuesday’s surge had already fulfilled as much bullishness as had been signaled by the surge’s earlier stages. Anxiousness ahead of the FOMC news ensured that optimism wouldn’t get out of hand overnight. And the last hour’s Triangle that triggered new session highs also doomed those highs to failure. In short, sellers did everything they could to prevent buyers from gaining traction.

The question for Thursday is whether sellers expended all of their energy restraining buyers. The answer is important because despite Wednesday’s late plunge to new session lows, the cash session close was back above the morning’s lows. And Wednesday night’s Globex open quickly recaptured the post-close slip that had tried to retain sellers’ newly found traction.

Wednesday’s sellers will not have gained any traction for their efforts, not unless Thursday’s open immediately breaks lower under ESz 914’00-916’00 to resume Wednesday’s late drop. The trajectory need not be the same, and it probably couldn’t be any steeper. But any delay in sellers exhibiting their control would mean they probably don’t have any. And a retest of Wednesday’s 970’00 highs would become likely, perhaps up to 987’00-990’00.

Indicators and Internals.
MACD & RSI plunged along with price on Wednesday’s late plunge. The 3-minute RSI was oversold at the last-minute low, making its retest likely. But only likely, and not required, since the last-minute window isn’t controlling. Nonetheless, Wednesday’s price action did honor overbought and oversold readings, so Thursday’s price action is likely to, as well.

Thursday’s opportunities.
The interest rate cut helps to mitigate unfavorable news from most near-term econ reports. So almost any reaction to GDP and Jobless Claims at 8:30 might prove to be knee-jerk. Presumably the FOMC made their decision with some sort of knowledge of these data, so they’re likely to match the narrative. That means surprises are less likely, so trending is easier to come by. But much will depend upon the open expressing a firm opinion one way or the other.[/pay]

[pay]Pattern notes.
Recently the market forest has been thinning itself naturally. It’s a delicate process as the environment absorbs decaying vegetation. At one stage the environment becomes a tinderbox. It only takes one careless camper to ignite blaze, destroying both the decaying flora and the very environment that was absorbing it.

I described a similar process underway in yesterday’s Trading Plan and Morning Market Tour. Gargantuan drops were being largely retraced, absorbing bearish fauna while the market changed seasons (from Fall, get it?). Then someone lit a match, igniting a 2-hour, 80-point, 9.5% rally.

With one big exception, Tuesday afternoon’s slope and degree were exactly how I described the next meaningful rally would begin. The exception was its origin – the rally needed to come from a new low, and not a minor one. The scarier, the better. But instead of swallowing pessimism whole, Tuesday’s surge sucked all of the environment’s optimistic oxygen.

The origin can make all the difference between a durable rally, and a corrective bounce. This one might extend a little further without reversing the trend to up, back up to the last downleg’s origin another 50 points higher at ESz 987’00-990’00. That’s where the market can make a bigger decision about extending its bear market rally higher, or else extending the bear market down to its outstanding 787’00-790’00 target.

Indicators and Internals.
MACD never really extended itself during Tuesday’s surge. The 3-minute RSI meanwhile became overbought and stayed overbought. That makes the surge’s high likely to be retested after an overnight pullback.

Wednesday’s opportunities.
Nervousness ahead of Wednesday afternoon’s 2:15pm FOMC announcement is already facilitating an overnight dip. The pre-FOMC anxiousness should inhibit sellers from regaining control just yet. Around 1:30am in the charting room I noted a buy signal above 922’25 targeting 929’25 and 935’75, which has so far reached 933’50. Durable Goods is due at 8:30am. Regardless of this bounce’s outcome, I’ll expect almost any pre-open pullback to largely recover, eventually entirely. [/pay]

[pay]Pattern notes.
Monday’s last-minute drop covered no new ground, so it was no more relevant than anything already established by previous price action. The peak just before 2:00pm came a little too early, and the acceleration just before 4:00pm came a little too late. Of course, neither too early nor too late to be productive – obviously, since the last-minute drop was 30 or 40 points, depending upon where the measurement begins. But that wasn’t a credible time for lasting opinion to rear its head. And it originated from a triangle that would require its retracement.

The drop has been retraced overnight, back up to ESz 878’50. This is despite initially extending down to 827’25 after the cash session close. Any drop Monday afternoon was going to continue dropping into the session’s last tick. Dropping further does prevent the drop from being considered counter-trend. It also creates fresh price action beyond the intraday range that can help attract price back to it for a retest.

This and other Globex extensions represent much of the attraction to lower prices. It isn’t Friday and Monday’s pre-open price action, twice consecutively threatening a gargantuan intraday drop, yet retracing all or most of the threat. And now Monday’s last-minute drop has been retraced overnight to counter a third threat. Sellers are being absorbed, but momentum is not reversing up, since the intraday rallies are only retracing lost ground but not extending higher. That leaves potential for intraday tests of the Globex extensions at lower prices.

Indicators and Internals.
MACD & RSI didn’t diverge positively simultaneously during Monday’s last-minute decline until after the cash-session close. The 51-point overnight rally from there was productive until a negative divergence at the 4:00am high produced a pullback down to  860’00. The 3-minute RSI was borderline oversold at the pullback’s low, so it isn’t clear whether its retest is likely.

Tuesday’s opportunities.
Currently, there’s a bounce up to 872’50 that has room down to 864’50, where any lower would target 851’25. Otherwise, extending the bounce above 874’00 would put into play 880’00 and higher. Consumer Confidence numbers are due at 10:00am. It’s probably a little too soon for price action to become paralyzed from anxiousness ahead of tomorrow’s FOMC interest rate news.

Two near-complete intraday retracements of overnight gargantuan drops did not trigger a rally. Instead they were followed by Monday’s last-minute gargantuan drop that was retraced Monday night. Clearly they are neutralizing potential opposition in preparation for a better rally effort soon. But if that effort isn’t evident by Tuesday’s open extending the overnight rally to new relative highs, then that would be buyers’ third strike. It would also be their third out, giving sellers another chance at 787’00 where buyers can try taking another swing.[/pay]