Market Wrap

[pay]Pattern notes.
Friday’s close at ESz 933’25 barely managed to close back under the 955’00 overnight high. Barely? 22 points? Actually, the last 60-80 minutes ranged 15 points either way of 955’00. The lower-end of this late range started giving way and the slide steepened into and out of the cash session close.

The range’s lower-end was also chipping away at support offered by Thursday’s 940’00 close. Not coincidentally, the morning’s breakout reacted back down to this same level before surging up to 987’75. It’s an important area, and closing under it was also important. It is similar in principle to the top that was sealed Tuesday morning. Coincidentally, Friday’s high was a 61.8% retracement back to Tuesday’s high, a healthy correction.

Monday’s open could still gap up above 940’00-945’00 to reject Friday’s last-minute downleg – I would give these buyers a benefit of the doubt, but not a very long lifespan. Otherwise, Friday afternoon’s drop is likely to bleed into Sunday night’s open, and Monday’s open could gap down under 911’00.

Indicators and Internals.
There was no unfinished business with MACD & RSI. The opening and closing 15 minute windows trended away from each other, so the Friday Factor offers no clue. More interesting than either of those factors could have been, is that the internal spreads diverged negatively; more NYSE up volume than down volume produced more declining issues than advancers.

Friday’s opportunities.
The last available relative low is Friday’s opening at 918’00. Gapping under it would set a negative tone for the morning, and probably for the day. Recent lows at 837’00 still require a retest by more than a few points. The path down is so clear, so I would buy eagerly if Monday’s open were gapping up enough, since something very bullish would be needed to point higher first at this stage of the pattern.[/pay]

[pay]Pattern notes.
There’s more than one way to skin a cat. They’re all pretty messy. We’ve grown accustomed to stages of the decline ignoring RSI’s positive divergences. Two or three of those in a row have alerted us to much greater selling pressure coming down the pipeline. The past week has seen several instances that are a different side of the same coin, when sellers earn the freedom to allow a bounce, but plow lower without delay.

Each scenario reflects pessimism that isn’t excessive, but very effectual. The last two opens have exhibited this trait, and each resulted in big losing sessions. Wednesday night’s Globex session has already dropped 19 points further, indicating a gap down back into last Friday’s range. Now, that’s pessimism.

Since this week’s corrective bounce never recovered the last downleg’s origin, the current drop back to the lows is part of the same leg. Its pessimism is the same pessimism. Hard to believe after a 230-point rally that has been retraced 180 points. Retesting Friday’s ESz 837’00 low in this environment could form a substantial bottom, assuming the low is probed more deeply than several points. Momentum could reverse up if the probe were recovered that day, and then again the next morning after another probe of prior lows.

If Thursday’s open does drop, only to stop and pop, then buyers would still be too optimistic and impatient for this to be a bottom. It might be a low that launches a bounce, but that’s a tough sell to market participants that just saw big failures after Monday’s rally and Tuesday afternoon’s surge.

Indicators and Internals.
Technicals made higher lows at the Globex session’s first low. The bounce from was retraced almost entirely, until 3-minute RSI became oversold again. This second low is so far only a retest of the prior low, so its RSI reading isn’t enough to doom bounces to failure. But the pattern points lower, which would reject two consecutive favorable RSI readings. And that would suggest much greater selling pressure coming down the pipeline.

Thursday’s opportunities.
Several high-profile econ reports come out through Thursday morning. Earnings, too. They haven’t been atrocious, which is a different narrative than being spun by the drop. So a premature bottoming attempt from slightly negative territory wouldn’t be surprising. Regardless, the trend remains down.[/pay]

[pay]Pattern notes.
After-hours earnings excitement is my main suspect for having saved the afternoon’s drop from extending down further. The last hour’s 37-point from the ESz 974’25 low wasn’t otherwise meant to be. It was a corrective bounce, meant to refuel sellers.

Several factors made this clear, such as the 1-minute RSI diverging negatively into the bounce’s high, and its peak upon probing 61.8% back into the afternoon’s prior swing. Oh, and the 22-point tumble to 980’00 around 7:00pm was a dead giveaway.

That tumble might also refuel buyers. The 13-point reaction needs to fail and fall to new session lows under 977’50 for a second downleg targeting 971’50. That’s not much of a second downleg, but it would pierce Tuesday’s cash session lows and almost put into play 952’00 and 900’00.

If this leg does not develop further, and recovers instead, sellers will have lost an opportunity to exploit the top they sealed at 10:15 Tuesday morning. The optimistic pre-open surge was already in retreat at the cash session open – but not before peaking at a 61.8% extension from Monday night’s last pullback. The retreat extended down under the two tops’ interim low through the opening sequence’s 10:15 timing window.

Having sealed the top, sellers had an excuse to bounce before extending lower, but they did not. If they can maintain their pace, the opportunity to exploit the sealed top could develop into retracing the larger corrective bounce from Friday’s low. If buyers gain traction instead, the corrective bounce could begin an entirely new leg to entirely new corrective bounce highs.

Indicators and Internals.
The 3-minute RSI was at its deepest oversold level when S&Ps tumbled to 980’00. The Globex timing doesn’t require the low’s retest, but it is likelier than not.

Wednesday’s opportunities.
Several econ reports should spice up the morning, as if the quarterly earnings onslaught won’t already have enhanced volatility. Beige Book is due at 2:00 and usually heats things up; this report is on September activity, so its response might be brief or muted. But if Wednesday’s open gaps under Tuesday’s 974’50 low, all of these items should prove to be catalysts for further declines.[/pay]

[pay]Pattern notes.
Is it safe, yet? The Dow’s 936’point gain and S&Ps 126-point gain were records. My working target before 3:15 was ESz 1020’00, at least 40 points higher. Monday’s high met it within 4 points. This sort of surge doesn’t reverse down on a dime, and Monday’s close was essentially the session highs, so at least a slightly higher high remains likely.

Longer-term this does nothing to the requirement that Friday’s low be retested. And now the retest will originate in another dimension. So instead of forming a durable bottom while in the neighborhood, the inevitable retest will likely be part of a new downleg.

The question is when that begins. A close Monday above 966’00 was going to immunize the market from selling pressure for several days. But that was before Monday’s rally was Monday’s rally. The session high just 45 minutes later was 50 points higher. Only a news event could gap Tuesday’s open down far enough to negate Monday’s late gain. But a 50-point pullback to 966’00 is another story. And it might be the next story, with the quarterly earnings onslaught soon upon us.

Indicators and Internals.
RSI was mixed at Monday’s highs before the last half-hour got underway. Internal spreads at the time were 10:1 (in favor) both between advancing and declining and issues, and between up and down volume. The spread is impressive, but a healthy advance would have lopsided ratios. The last half-hour surged an amazing 35 S&Ps points. More amazing is that internal spreads expanded to 18:1. Each. And that’s what’s most amazing, that internals remained evenly balanced into that seemingly wanton buying. Perhaps it was a little more controlled than it appeared.

Tuesday’s opportunities.
An overnight dip to 1003’00-1004’00 would be the ideal pullback for launching a drive up to 1020’00. There might be some fine-tuning to that level before the open, but this is essentially where we should start to see buyers evaporate. A gap down or deeper break might not recover before more backing and filling. But an outstanding gap back to Monday’s close would help to keep alive the recovery’s momentum.[/pay]

[pay]Pattern notes.
Friday’s early spike down to ESz 837’00 was quickly reversed up to 922’00. My warning then is the same as now: The action speaks to elasticity, not direction. Rather than proving that sellers could be absorbed, the big swing proved only that the market is vulnerable to big swings. Two more big swings followed, this time reaching 943’00.

What did the buyers of these big swings accomplish? They did chip away at the overnight resistance around 922’00. And they chipped away at the decline’s 911’00 target that was fulfilled at Thursday’s lows. But despite these probes above the resistance of prior highs and prior lows – despite how far and despite how aggressively – the resistance held as resistance at the close (on both cash and futures, shows on the nearby charts).

Indeed the close was under Thursday’s late low by the narrowest margin possible without buyers actually gaining traction. Perhaps that is because Friday’s 837’00 low still requires a retest. Perhaps it is because Friday’s negative close kept alive the 10-day sequence I described in Friday’s Trading Plan, fulfilling the crash template. The late dip did make the closing 15 minutes match the open’s 15 minutes – the Friday Factor now expects Monday’s first 15 minutes to also trend down.

Indicators and Internals.
The 1-minute RSI reached oversold at the last-minute low. But the 3-minute RSI at the late high didn’t leave any requirement to be retested.

Monday’s opportunities.
There is no requirement to retest either of Friday’s intraday highs. Doing so would be motivated by some other factor. I would give such strength a benefit of the doubt for being able to extend higher – especially if it meant gapping up above Friday’s 943’00 high – unless something else has appeared to suggest otherwise. There is room up to 909’00 without beginning to signal that buyers are gaining traction.

But just having closed under 893’00 means sellers are currently in control, targeting at least the 867’00 area on the next downleg. The pattern remains vulnerable to fulfilling the required retest of Friday’s 837’00 low, not to mention the crash template. The Columbus Day holiday is an unknown factor in this environment.[/pay]