Market Wrap

[pay]Pattern notes.
Earlier I commented on the rarity of reversing from one bias target to the other, while the original target’s bias environment was intact. That was just the warm-up act. The one-hour, 18-point swing had corrected down only 10 point when a half-hour, 23-point surge blew out the prior day’s highs. And that was 42 points off session lows.

There’s still unfinished business below, but more pressing matters may have appeared. The “Gotcha!” setup is intended to identify such situations – when a rally is creating more buying energy than it is expending. It is triggered by closing back above a trend’s low close after probing new trend lows intraday. Wednesday’s new low was too brief and shallow to qualify. Did Thursday’s last-minute surge above prior highs disqualify the Gotcha again? Sliding at Friday’s open would suggest as much.

Thursday’s opening gap under 1218’00 requires an eventual retest, and I wouldn’t bet against it happening Friday if 1240’00 area fails to hold pullbacks. The 1240’00 area won’t break without bad news, not after three consecutive lower lows were recovered in two consecutive days. Lasting or not, the recoveries will inhibit sponsorship for a fourth sell-off before the weekend’s illiquidity. Ignoring that recent history in favor of breaking under 1240’00 would mean much bigger selling pressure coming down the pipeline.

Indicators and Internals.
3-min RSI barely went overbought at Thursday’s last-minute high. It had barely avoided becoming overbought on the session’s prior highs. This makes the rally seem more reactive than proactive, corrective rather than lasting. Internals diverged negatively, since more up volume than down volume produced more declining issues than advancers. That’s not easily dismissed since S&Ps ranged in positive territory for several hours Thursday afternoon. If the LEH/BAC rumor is all that prevented a significant peak, then it was only delayed.

Friday’s opening setup.
Sliding into negative territory would not be appropriate for a Gotcha setup, so it would not be bullish. But gapping down Friday instead of sliding would be different and would more likely recover – probably from the opening tick – in order to fill the resulting gap back to Thursday’s close. Several econ reports due in addition to LEH’s possible deal, including PPI at 8:30 and Consumer Sentiment at 10:00. All tend to be influential.[/pay]

[pay]Pattern notes.
Wednesday’s price action incorporated some of the same last-minute behavior as Tuesday. The last instance was the afternoon’s No-bias rally, whose first peak at 1244’00 was retraced back to the 1237’00 sell signal where another bounce retested the first. When the session’s last timing window of 3:20-3:30 got underway, S&Ps were reversing back under the prior high while MACD & RSI diverged negatively. A timing window is normally associated with breaking something, not retesting it.

The effect was the same, quickly dropping back to and through the sell signal on the way to 1330’00. This No-bias rally’s origin was probed by 1-2 points, then recovered, robbing sellers of their traction. A test of 1227’50 remains likely, but the lost traction requires either a bounce to refuel the last hour’s drop, or else a gap down to restart it.

Having to refuel does give buyers a chance to gain traction for prolonging or extending the bounce. Wednesday’s new session high was retraced back to its origin, but its origin held as support – the bounce was retraced, but not yet rejected. Regardless of when, I do expect the decline to resume. Wednesday’s low stopped far short of retesting Friday’s prior low, or closing high enough so that wouldn’t matter. The hesitation is due to optimism, and that’s not the stuff of durable bottoms.

Indicators and Internals.
15% more NYSE up volume than down volume produced 20% more advancing issues than decliners. The session was already a winner, but this doesn’t entirely mute Thursday’s obligation to reward Wednesday’s buyers for their relative productivity.

Thursday’s opening setup.
Several econ reports at 8:30 offer several opportunities shake things up. Back above 1235’50 would target 1241’25, where any higher could trigger a session-long rally. Just the opposite effect would begin under 1231’25 and 1227’50. Reminder: The front-month rolls to Dec expiration after Thursday’s <strike>close</srike> OPEN, NOT CLOSE. [/pay]

[pay]Pattern notes.
What the Fed giveth… Tuesday’s selling left no unfinished business, testing both Friday’s open and closing gaps. It was relentless from the opening tick to its last. The cash session’s last tick. Futures bounced 5 points, settling 3 points off the 1223’50 low where S&Ps were down more than 43 points.

The Dow’s 280-point loss was relatively mild. Its outperformance during a decline tends to reflect cautious optimism as bigger money players think they’re bottom-fishing safer names. This doesn’t often end well for them – the managers, and the stocks.

Tuesday’s close was too deep for being only a corrective pullback. Wednesday’s open could gap up to reject it, extending higher for hours or days, but the gap back to Tuesday’s close would inhibit a durable rally from forming.
Indicators and Internals.
3-min RSI was oversold at Tuesday’s last-minute low, dooming to failure any subsequent bounce. NYSE up volume was 10% of down volume, and advancing issues vs. decliners wasn’t much stronger. The “extreme” selling pressure’s productivity wasn’t very lopsided, suggesting that sellers have plenty of energy left to continue pressuring the market lower.

Wednesday’s opening setup.
Last week’s decline was on-track to retest the year’s low at 1220’50, probably down to 1194’00. That still looks right, especially if bounces overnight hold any test of 1232’00. Now I expect the low to be probed more deeply, regardless of whether its test produces an obligatory bounce. Bias parameters will be published in the morning. The econ calendar is almost irrelevant, but that doesn’t mean no news will be good news. The calendar is very heavy Thursday and Friday.[/pay]

[pay]Pattern notes.
There isn’t much historical data available to compare 35-point gaps up. The market still responded to principles – the overnight rally was unlikely to extend into the cash session, and it didn’t. Not right away.The morning’s last downleg finally jived with one template, and then another. Several predictable targets culminated in a last-hour breakout to new afternoon highs.

S&Ps tested 1268’00-1270’00 into and out of the cash session close. That peak was important because an Ascending Triangle had formed since the noon hour’s low. Ascending Triangles tend to break initially in the wrong direction, then reverse more substantially in the opposite direction. And this triangle’s minimum target was met and held at the afternoon’s high.

The 1282’00 pre-open high is a “new Globex trend extreme” that requires a retest intraday. It’s probably in-play if Monday’s noon hour range under 1260’00 isn’t being threatened soon after Tuesday’s open. But I wouldn’t wait up late for any recovery if Monday’s noon hour range is probed too deeply.

Indicators and Internals.
1-min MACD & RSI deteriorated into Monday’s last-minute higher high. 3-min simply stopped improving along with price. The spread between advancing issues and declining issues didn’t keep pace with the up and down volume ratio, obligating Tuesday’s session to reward Monday’s sellers for their relative productivity.

Tuesday’s opening setup.
The morning’s bias-down parameter reflects Monday’s last-hour rally having been the afternoon triangle’s false break. It is possible that the triangle’s false break has yet more ground to cover before failing. Several econ reports due through the morning have catalyzed volatility often, so early trending can’t be relied upon to extend without interruption – especially in this environment.[/pay]

[pay]Pattern notes.
The last big government bailout triggered a months-long rally. That was Bear Stearns (BSC), which is the natural comparison for this weekend’s news about Fannie (FNM) and Freddie (FRE) conservatorships. That it is also the only comparison doesn’t much matter to me. Fundamentals of the deal don’t inform my technical analysis. And my chart interpretation never acknowledges more than the timing of news, not its substance. The deal points are still of interest to anticipate and understand the sentiment reaction, both knee-jerk and longer-term.

The nearby chart depicts S&P Cash (SPX) price action leading into and out of the BSC rescue. The red bars are Friday before the deal, which fell sharply through the open until testing the prior day’s low (red dashes). The prior day’s low also held an afternoon retest, preventing sellers from gaining any traction. Monday’s reaction opened down sharply again (blue bars, to represent the color everyone’s faces turned while holding their collective breath). The lower low held two tests of Monday’s prior low (blue dashes), which at that point was a new trend low. Despite the lower low, sellers still didn’t gain any traction.

Last week’s price action depicted here was obviously different, and less obviously similar. Selling got underway when the week began Tuesday, and continued through Friday’s open. The pace slowed Wednesday (green bars) and and made no net progress Friday. In the process, Friday did recover its intraday test of July 28’s 1235’00 prior low (red dashes). The next lower low is 1200’50, too deep to expect an intraday round-trip. But a rally would get a big benefit of the doubt if any probe under Friday’s 1216’50 low is recovered to close above the 1235’00 prior low.

Friday’s close nearly recovered above Thursday’s last relative high. It came close enough to succeed, but didn’t. That’s ineffectual optimism, since all the afternoon accomplished was to neutralize the morning’s pent-up oversold buying pressure. Unless something significant develops Sunday night, it appears that Monday’s market will focus less on whether another bailout can spark another rally, and more on how that last rally turned out.

Indicators and Internals.
Advancing issues were essentially flat with decliners Friday, despite at least 50% more NYSE up volume than down volume. This is another form of ineffectual optimism, similar to the price action described above. The only outstanding signal might have been an overbought 3-min RSI. Its last-minute occurrence undermines its relevance, making it barely even likely to be retested, and certainly not required. By the same token, its retest wouldn’t neutralize any meaningful attraction, so its retest alone would not justify selling there.

Monday’s opening setup.
The gap down to Friday’s 1229’00 open wants to be filled. This would have been the case no matter how high Friday’s recovery had closed. Initial optimism Sunday night could probe 1251’00, possibly even 1260’00, and I would happily ride either leg (with a tight stop and short attention span). But a rally at this stage of the pattern would be doomed if born of enthusiasm and excitement. The only bottom to believe is one that has absorbed the worst reaction to news. Unfortunately, I suspect this stage of the pattern will try that route, and fail.[/pay]