Market Wrap

[pay]Pattern notes.
An sort of inverted Head & Shoulders formed into Thursday’s close. A post-close surge met and held the pattern’s corrective bounce target at ESz 1124’75. The buying pressure was neutralized. There are repeated examples of excess optimism on the way down. And there is no unfinished business above.

There is, however, unfinished business below. It is Monday’s post-close “new Globex trend extreme” at 1112’00. Thursday’s sell-off could have taken care of that if buyers had been more patient. Instead their optimism prevented even Monday’s intraday lows from being retested.

Sellers might still be marginalized if Friday’s open were to maintain a recovery above the 1130’00 area. Sellers might become expended if a dip under 1118’00 recovers back above 1126’00. Whatever might happen, there can be no durable bottom without recovering from a test of 1112’00, and a test of 1112’00 isn’t required to recover.

Indicators and Internals.
1-minute RSI diverged negatively into the post-close surge that fulfilled buying pressure. That was again one of the very few technical extreme readings. The 3-min RSI never again became overbought or oversold after 11:00am. The complacency doesn’t help trending to reverse.

Friday’s opportunities.
Hanging over this market is the House vote on the bailout package, and that second chance doesn’t seem to be holding the market together. First comes the Employment Situation report at 8:30 and then the ISM Survey at 10:00. This could affect anticipation for a rate cut that is rumored under consideration to spur the economy. Before all that is a little debate, and its outcome might be the most predictable of all ;)[/pay]

[pay]Pattern notes.
The mid-afternoon pattern’s template had predicted the potential for trading higher, but not permanently, and then only after grinding higher. Well, S&Ps firmed to ESz 1174’00, slightly higher new session highs for Wednesday, four hours after the cash session close. The Senate just started voting, and S&Ps are backing off almost 5 points.

Wednesday’s gap open under Tuesday afternoon’s last relative low makes me suspect that the gap down’s recovery wasn’t very sincere. A gap open Thursday above Tuesday’s 1175’75 high would get a benefit of the doubt for being able to recover from immediate selling pressure. But gapping up and running higher without correction doesn’t happen often in this pattern – at least, not without serious repercussions before extending too high for too long.

The alternative outcome would be for Thursday’s open to gap down under the afternoon’s 1153’00-1155’00 low. That’s where Buffet’s GE news saved the market from resuming the decline. The news was surprising, but the type of news shouldn’t be. The SEC extended the short-selling ban another two weeks, which also shouldn’t be surprising. Rallies shouldn’t last when they’re sparked by news that shouldn’t be surprising. If this alternative outcome plays out, then S&Ps will quickly retest Wednesday’s low. And retesting Wednesday’s low this soon would almost certainly put into play a retest of Monday’s low, too.

Indicators and Internals.
Wednesday’s internal spreads were essentially even with each other. During a sustainable rally I would expect to see signs of accumulation after recovering all of a gap down. Instead it appears that the intraday recovery may have only refueled sellers.

Thursday’s opportunities.
Several interesting data points are revealed Thursday morning. Several econ reports whose focus is mostly on employment, shared with ECB interest rate news. Senate passage of the bailout bill is almost as likely as the sun rising in the East again. A rally on passage of the bill – if only a relief rally – is fourth or fifth on the list of likelihoods. It follows this one: Look out below if the Senate votes yes, but the market doesn’t rally. I’ll be in the charting room overnight to see how the reaction is going.[/pay]

[pay]Pattern notes.
The third-biggest point gain was an inside day, a session-long rally that retraced all of Monday afternoon’s plunge back to its origin. More damning is that the session-long rally was bounded by the prior afternoon’s range alone, a combination that normally proves to be a correction.

The peak completed a 61.8% retracement from Monday’s post-close low (ESz 1112’00) back to Friday’s close. There are many Fibonacci relationships between the relevant price points of Tuesday’s price action, and patterns that formed during previous sessions. This suggests strongly that Tuesday’s price action was a reaction to – and part of – the decline. It was not a new rally leg.

We already knew about the unfinished business back at Monday’s lows that needs to be retested intraday: the gap from Monday’s close, and the post-close low that is a “new Globex trend extreme.” It’s not bad news for bulls, if they can temper their optimism for now. Tuesday’s rally nearly recovered above a prior low, which would have made the eventual retest of Monday’s low less likely to hold.

A better bottom would form if the charge to new lows were lead by exhausted pessimists, instead of by refueled bears. But that won’t be on the agenda if Wednesday’s open isn’t already trying to reverse back under Tuesday morning’s 1152’00 high. The alternative to early selling Wednesday would probably extend Tuesday’s rally. That would still be vulnerable to an afternoon reversal, which would be the last chance to derail a more substantial bear market rally.

Indicators and Internals.
RSI fought becoming either overbought or oversold throughout Tuesday’s session.  The exceptions were uncharacteristically rare. The complacency that this reflects is difficult to maintain, so a choppy session should follow. The session ended with 1-minute diverging negatively, but 3-minute wasn’t extended enough for the immediate fallout to be substantial.

Wednesday’s opportunities.
Tuesday’s last-minute gains were made almost grudgingly. A short-squeeze was ready to go but waited minutes too long to resume. Instead the market limped higher into the close. The consolidation prior to that can have a second chance to launch a surge. Pullbacks should hold 1161’00-1162’00, and not break under 1158’00. Otherwise, a run at Monday’s lows would be much easier to accomplish this week.[/pay]

[pay]Pattern notes.
Ugly. The afternoon’s first plunge created a low that required being retested because it had formed a sentiment extreme and its 3-minute RSI was oversold. A second plunge stopped short of retesting the low. That optimism doomed the next bounce to failure, and the low was retested.

The retest bottomed going into and coming out of 3:30, then bouncing 25 points in 15 minutes. That’s not a terrible bottom as bottoms go. But it’s only part of a bottom that still requires an intraday probe of lower lows that recovers to close positive.

It’s entirely possible that the selling was exacerbated by the pre-holiday’s timing (Jewish New Year). Participation will be reduced, and sponsorship for trending will be difficult to generate, so there didn’t seem to be much reason for holding longs. It’s not a buy signal, but it’s one step closer. At this moment however, that one step could be a big one.

Indicators and Internals.
The retest’s RSI was oversold again at the last hour’s low. It wasn’t as straightforward as the first plunge’s low that required a retest. But S&Ps dropped almost 15 points after the cash session close, to within 5 of points of session lows, so a retest is almost obligatory.

Tuesday’s opportunities.
I was able to annotate the charting room overnight until 4:00am yesterday, and will be on-line overnight as much as possible. Meanwhile, here are some things you can do in this environment:

Practice deep-breathing. Being on the right side of a trade is no less stressful than the wrong side on days like this. Proper breathing can help to sharpen your focus on any day.

Share your success stories. Market gyrations like these leave me no time to trade. It takes one hand to count the number of trades I’ve gotten off in the past two weeks. I’m dying to hear details. Let me know how you’re doing so I can at least experience it vicariously!

Share your non-success stories. The market moves have been amazing, and we’ve generally anticipated both big moves and small. I want to know if you’re not catching your share.

Have a Happy New Year! If you’re celebrating tonight and tomorrow, don’t worry. The markets will be right here where you left them.

[/pay]

[pay]Pattern notes.
Friday’s close recovered what had opened to be a substantial loss. The session’s steady buying was gutsy considering the uncertainty of timing a bailout deal – not that any deal is a winner, but at least the playing field and risk measures could be defined. The environment included bearish focus towards two banks on either side of the Atlantic. Sometimes “gutsy” is bullish. Other times it is misplaced optimism.

If Friday’s recovery was the bullish kind of gutsy, then Monday’s open will need to gap up above Thursday’s ESz 1225’00 prior highs. That would reflect the fresh buyer that the rally now needs, because Friday’s last-hour rally expended more buying pressure than it created.

Friday’s buyers are expended for three reasons: First, the 23-point surge to 1221’00 probed at least 61.8% of the consolidation at Thursday’s highs, and held it on a closing basis, which qualifies as a complete correction. Second, the surge filled the gap back to Thursday’s close, neutralizing its magnetic attraction to higher prices. And third, S&Ps dipped after the cash session close, back under Thursday’s last relative high at 1216’75, robbing buyers of their traction. Almost any weakness at Monday’s open would be bearish.

A gap up would be bulish. And by the way, it would be a new rally leg. It would not be an extension of the leg that began very late Wednesday. The distinction is important, because it would mean that a gap up’s retracement can’t double-back under Friday’s high – at least, not by very much or for very long, and not during any relevant timing window. Otherwise, the rally’s resumption would have failed, and a new downleg would be required to take its place.

Indicators and Internals.
NYSE down volume was 50% greater than up volume Friday. Yet it produced two times more declining issues than advancers. Overbought 3-min RSI did accompany the last-minute high, timing that doesn’t necessarily require retesting the last-minute high.

Monday’s opportunities.
A bailout deal is reportedly moving closer as of Sunday morning. It could be all but finalized in time for a relief rally Sunday night. Perhaps Friday’s recovery positioned the market favorably to leverage an overnight relief rally into a gap up Monday. There’s room up to 1234’00 and 1245’00. There is also a “V” bottom outstanding from the recent 1136’50 low that wants to be retested, waiting for an excuse and a clean shot.[/pay]