Market Wrap

[pay]Pattern notes.
Thursday’s close was above the morning’s high, which is important because it was produced by gapping up from a downtrend’s new low. That, and because the close came after recovering from a new trend low intraday. The setup is a Pivot Reversal that tends to extend higher for multiple days.

Pivot Reversals that don’t extend higher are usually busy extending lower. Trading flat to lower Friday could be very bearish. A 3-hour, 82-point rally might seem impervious to reversal – corrective retracement maybe, but reversal?

Several reasons against extending higher Friday. 1) Thursday’s last-minute high filled the gap back to Tuesday’s 1217’00 close, leaving no unfinished business at higher levels to attract price higher. 2) The late surge far exceeded the morning’s high and expended buying energy that might be sorely missed at Friday’s open.  3) The last pattern prior to the high was a Running Correction that tends to precede a trend’s end. 4) The low was a “V” bottom that tends to be retested eventually.

The preliminary work of a market crash is to squeeze all available funds from market participants, i.e. refuel. Multi-hundred point intraday rallies that recover no relevant real estate allow the decline’s chart to remain intact. It also greases the way for renewed selling. I will be among the market’s biggest bulls if the 1220’00-1223’50 area can be recovered on a closing basis. Meanwhile, I continue to marvel at the market’s big bull&4!+ it has been getting away with, and might still be.

Indicators and Internals.
1-min RSI deteriorated and diverged negatively into the running correction that preceded Thursday’s last-minute high. It was similar to Gold’s chart through a couple of days ago. We expected it to trade a little higher before peaking, but not dozens of points. The S&P deterioration is similar, and not declining Friday or else at Monday’s open would start to be very bullish.

Friday’s opening setup.
The econ calendar is clear in deference to the session’s Quadruple Witch expiration. Bonds have in the past also traded un-remarkably in respect, but there have been a couple of exceptions recently. I will update here and visit the charting room overnight in case of earlier setups. [/pay]

[pay]Pattern notes.
MACD & RSI diverged negatively into Wednesday’s last-hour high at ESz 1194’00, triggering a domino effect that led to new session lows. The divergence put into play a retest of the 1177’50 prior low, too close to the session’s last half-hour to be recovered. And since that was back under the noon hour’s high, the recovery setup was doomed to produce just the opposite. The magnetic attraction back to Tuesday’s 1163’00 pre-open low was the final nail in the coffin.

Wednesday’s wide swing was just one more opportunity to absorb buyers without letting them gain any traction. MACD & RSI positive divergences were no longer ignored, but the decline no longer needs that tactic, because now it has the traction of new lows to keep it alive.

That doesn’t close the door to another corrective bounce targeting 1172’00-1173’00, or 1182’50-1185’00. Not bouncing might be more surprising, considering the current perpetual engine of failed rallies. But not bouncing would be a more normal reaction after so many failed rallies. It might soon be the reaction, similar to the environment leading into 1987’s Black Monday.

Indicators and Internals.
3-minute RSI was oversold at the last-minute price low, indicating that a corrective bounce would fail.

Thursday’s opening setup.
Jobless Claims at 8:30 is followed by LEI and the Philly Fed survey at 10:00. This is the last trading session before Friday’s Quadruple Witch expiration. Rest up, drink plenty of fluids, and have a healthy breakfast. Things are finally going to get interesting.[/pay]

[pay]Pattern notes.
Monday’s price action gave multiple indications of much greater selling pressure coming down the pipeline. Another 33 points were lost overnight, so I consider those indications to have been fulfilled. That could be pretty bullish. In fact, S&Ps rallied nearly 60 points from the low, traversing about 10 points more intraday than during Monday’s drop.

So did the session-long rally prove that selling pressure had run its course, or did it fulfill that pressure? Perhaps a little of each.

Selling for selling’s sake may have ended, but that doesn’t mean a rally can begin or that the low can’t be retested. Indeed Tuesday’s pre-open low is a new Globex trend extreme at 1163’00 that requires an intraday retest. Meanwhile the rally into Tuesday’s highs fulfilled its highest likely target. And then it peaked, instead of renewing buying pressure that might have attracted price higher. Several attempts to restart the rally as high as 1221’00 were rejected into and out of the close, before the Globex open tumbled to 1197’50.

I’m open-minded to the potential that a durable bottom is forming and that a larger multi-session corrective bounce is being readied. That means a drop back down to Tuesday’s lows need not be fatal. There’s a lot of room for noise to fluctuate without trending any further day-to-day. There just isn’t a lot of time.

Indicators and Internals.
The 3-min RSI was oversold at the low before Tuesday’s open. The timing makes it likely to be retested, not required. There is no similar unfinished business above the market.

Wednesday’s opening setup.
The final disposition of LEH and AIG is ongoing. The econ calendar isn’t very busy, but Friday’s options expiration should start influencing price behavior. The pattern into Tuesday’s close formed a bearish Double Top whose interim consolidation was sloped up, which the Globex open’s drop seemed to fulfill. The same pattern ended Friday’s session, and being a corrective pattern, Friday’s session then ended with a last-minute surge to higher highs. An overnight recovery to higher highs would be likely to peak and reverse down substantially, probably from the 1224’00-1225’00 area.[/pay]

[pay]Pattern notes.
The decline reached several important milestones Monday. The prior low at 1200’50 was retested. The retest stopped at its 1196’00 target. The pre-open “new Globex trend extreme” was retested in the process. And yet, it’s not enough.

After rallying 36 points from pre-open lows, S&Ps had become sufficiently top-heavy to make new session lows likely. And new session lows arrived. But the path there was uneventful and hardly the stuff of bottoms. In fact, the first probe of new cash session lows was limited to 1 tick before bouncing. The pre-open low’s first probe was 2 ticks. In the midst of falling dozens of points in only several hours, optimism was still fighting for control. This, too, is hardly the stuff of bottoms.

An immediate bounce is still possible. Considering the relentless optimism and the technicals at Monday’s close (more on that below), an immediate bounce might arguably be likely. Of course, a gap up would leave outstanding the gap back to Monday’s close to inhibit durable rallies. As I recall the last “Black Monday” was followed by a somewhat dark Tuesday morning

Indicators and Internals.
MACD & RSI diverged positively among both 1-min and 3-min periods going into and coming out of Monday’s cash session close. That might be something buyers can build on overnight, but there’s no requirement for even a brief bounce from last-minute technical setups. Meanwhile, the spreads between NYSE up and down volume, and between advancing and declining issues, were wide ;)

Tuesday’s opening setup.
FOMC might adjust interest rates at 2:15. That usually sparks volatility on a slow news week. This is not a slow news week, so the customary pre-news paralysis might be less effectual than usual. Relatively subdued overnight price action might merit issuing bias parameters, but otherwise I would rather focus on patterns again.[/pay]

[pay]Pattern notes.
S&Ps gapped down 25 points Sunday night and extended 20 points further, reversing from Friday’s ESz 1258’50 close down to 1215’50. This retested Thursday’s opening gap down, and also the prior Friday’s low. Retests of both were required. And so is there eventual break.

Sunday’s open gapped under a prior low from a prior high. This pattern requires so much selling pressure that it is generally followed by another downleg. The next downleg is a function of the first one, and it’s measurements are already staggering – if that is actually the first downleg. It is possible that Monday’s cash session will gap under prior lows and produce a much larger first leg down.

Bottom-fishing might be expected since several recent attempts have been rewarding (to those who already sold). In case of a gap down Monday, I don’t expect to find much justification for more than a shallow bounce or two. And in case the overnight range is defined by 1220’00-1235’00, an early dive to new lows would be probable.

Bounces defined by hours instead of minutes won’t be likely until after probing 1200’00. And disaster won’t be averted (again) – at least momentarily (again) – without recovering above the 1243’00 area. The largest players have their largest investments exposed beyond their largest risk tolerances. The fluctuations will be enormous as these players, investments and risks are made smaller throughout the day.

Indicators and Internals.
There hasn’t yet been enough time elapsed since the gap down for 3-min RSI to become useful. But a bounce back up to 1233’00 is now testing 1222’00 where 1-min RSI is indicating the vulnerability to a bounce, which the pattern also has potential. The same pattern expects the decline’s pace to accelerate under 1220’00, but keep an eye on technicals then.

Monday’s opening setup.
I’ll have more comments here and in the charting room overnight. Soon we’ll know which way the LEH situation went, and perhaps also BAC’s overture to MER. Two econ reports are due pre-open, and they’re among the last publicly available metrics that Tuesday’s FOMC meeting will consider. Stay-tuned for the latest.[/pay]