Market Wrap

[pay]Pattern notes.
I had described Tuesday’s session long decline as among the most bearish I had seen in some time. There’s no better evidence than Thursday’s plummet. And by the way, Thursday’s session was no less bearish than Tuesday. Wednesday’s interim session had ended flat after chipping away at support, apparently making it easier for Thursday’s session to drop through it.

I don’t expect Friday’s session isn’t likely to serve as a similar stalking horse. Its choices are probably limited to either refueling sellers with a steep bounce, or else resuming the week’s decline in a very big way. Possibly both.

Thursday’s low was defined by the 1235’00 target, which also filled a gap there that had remained outstanding. Having fulfilled the selling pressure that created this target, a bounce would help to refuel sellers, either overnight or in reaction to Friday’s Employment report.

Or never. Markets tend to stabilize in the afternoon prior to a weighty economic report, which Thursday afternoon certainly did not. The drop went beyond qualifying as excessive pessimism that was discounting too much bad news into price. Instead the drop created momentum that might swallow Friday’s news on the way to new lows for the year.

Indicators and Internals.
Internal spreads were extreme Thursday. Similar to the discussion above, their ratios went beyond being lopsided, and simply reflected a selling momentum likely to extend further.

Friday’s opening setup.
The 1235’00 level’s significance cannot be overstated. There is room for bouncing up to 1251’00 without buyers gaining traction, and sellers could be refueled. The level’s significance could also yield a sizable gap down whose only concern is whether its selling pressure formed a capitulation low. In either event, the ultimate resolution could very easily be a “crash” like session that targets new lows under 1200’00.[/pay]

[pay]Pattern notes.
Tuesday’s session was one of the most bearish I’ve seen in some time, and the past two weeks’ lows around 1263’00 still required a retest.Wednesday’s session probed lower lows before recovering through the noon hour. A late-afternoon attempts to resume the decline was also recovered.

Wednesday’s close actually ended the day almost unchanged from Tuesday’s close.  The morning’s probes under 1266’00 weren’t any more accumulative than the afternoon’s attack on 1266’00. Each produced a 10-point bounce, and only one has failed so far.

Wednesday’s session nearly closed above the upper-ends of the two consolidations that developed off of the 1263’00 low. The same factor Tuesday led to Wednesday’s steep drop, and Wednesday’s recurrence should produce a drop Thursday. A second consecutive reaction should not hope to recover or delay the decline like Wednesday.

Meanwhile, recovering above Wednesday’s 1280’00 highs would create a helpful posture for absorbing any negative reaction to Friday’s Employment Situation report. And there isn’t much use for absorbing negative reactions when there is unfinished business at lower levels that requires being tested sooner rather than later.

Indicators and Internals.
Internals were essentially flat with each other, except that they weren’t. Slightly less NYSE up volume than down volume produced slightly more advancing issues than decliners. Technically this is a positive divergence that obligates Thursday’s market to reward Wednesday’s buyers for their relative productivity. But spreads weren’t wide either way to have confidence. Anyway, I already suspect that the initial trending attempt will fail, since RSI barely had a pulse during the last hour’s rally.

Thursday’s opening setup.
Wednesday’s close recovered from new lows to close back above the prior day’s low. Recovering Wednesday morning’s 1280’00 pivotal high would amazingly offer a reason to delay the retest of last week’s lows, in favor of probing the low 1290‘s as resistance. Just gapping up above 1278’00 would start to be bullish. Meanwhile, back under 1271’00 would reject Wednesday’s last-hour, no pulse rally, and reinstate the morning’s decline.[/pay]

[pay]Pattern notes.
The stunning rejection of Tuesday morning’s probe of prior highs is one of the most bearish patterns I have seen in the market for some time. The break under the 1283’00 area put sellers back in control. It also required that sellers be almost immediately productive, or else leave a void that would suck-in buyers for the potential to rally big.

Tuesday’s 1271’50 low probed the upper-end of the two consolidations that had developed during each of the past two weeks, whose lower-ends had tested the 1263’00 area. This event – the upper-end probe – typically resolves in either a bounce, or else a gap down under the consolidation’s lower-end. I found no pattern at Tuesday’s low to signal or require a bounce, so if there is a bounce overnight anyway, it would be considered only noise that is likely to resolve down.

The 1263’00 area has required a retest, its retest is likely to be an intraday probe, and the probe is likely to evolve into a new downleg. Unless Tuesday’s bearish pattern is somehow rejected and refuted Wednesday, this could be a very bearish week.

Indicators and Internals.
MACD & RSI diverged positively several times throughout Tuesday’s decline. But the setups were largely ignored in favor of printing lower lows. The last hour’s bounce retraced back to the origin of the first ignored positive divergence, then closed there. Whether or not followed by a bounce overnight, the timing suggests that buyers did not gain traction.

Wednesday’s opening setup.
Closing under 1278’00 confirmed that sellers are back in control. An overnight bounce to 1281’00-1283’00 that reverses back under 1275’00 would signal that Tuesday’s decline was bleeding into Wednesday. Any higher bounce would rob sellers of their traction, but I wouldn’t turn bullish without S&Ps closing above 1291’50. [/pay]

[pay]Pattern notes.
Rule number one of low volume is it can reveal whether “weak hands” are sellers, or buyers. Timing windows are similar, and often the two go hand-in-hand. It’s not about direction – a low volume rally can still be bullish – but about the reaction to a rally, or to a test of resistance or of a prior high.

Thursday’s low-volume rally gapped above the consolidation at Wednesday’s high and extended above the previous Friday’s prior high (each circled on the nearby chart). Any higher and the rally would have signaled its intent to extend 2-3 dozen more points higher. I gave the rally a benefit of the doubt, since it had benefited from low volume and volume wasn’t about to improve.

My only problem with Thursday morning’s surge was its last-minute timing, but then that’s how doomed rallies begin. Friday’s open gapped down to retrace all of Thursday’s late-morning gain (purple arrows). The rally met its doom sooner than I had expected.

Friday’s low filled the gap back to Wednesday’s close, neutralizing its magnetic attraction. Friday’s cash session close was slightly under the prior Friday’s low (yellow highlight) but the futures close was still testing it, so its recovery wasn’t completely rejected. Friday’s drop retraced Thursday’s rally but ended just before it would have rejected it.

The past two weeks’ lows around 1260’00-1263’00 remain likely to be tested, probed and broken. This likelihood would all but disappear if S&Ps recovered Friday’s retracement of Thursday’s breakout. Low participation might allow a short and shallow bounce before resuming the decline. But the clock started ticking when the rally was retraced, and delaying a drop would be bullish. Regardless, buyers don’t begin to gain traction without recovering above 1291’50 through a relevant timing window.

Indicators and Internals.
2-1/2 times more NYSE down volume Friday than up volume produced only 75% more declining issues than advancers. Total volume was unremarkable, which doesn’t prevent rewarding buyers for their relative productivity. But it does require a bounce to fail at least one. Oversold RSI just after the cash session close doesn’t help buyers, either.

Tuesday’s opening setup.
(Parameters can apply to Sunday night’s Globex session, which trades 6:00pm through 11:30am ET Monday. I will update overnight, and again before Tuesday’s open.) Friday’s last-minute low barely managed to fill the gap back to Wednesday’s close. Leaving this unresolved would have left something nearby on the table to reinvigorate selling Sunday night. Its test was brief enough to expect a repeat, so any initial bounce should fail until that is resolved. Meanwhile, with no active reason for extending down, extending down would imply that new or bigger reasons have emerged.[/pay]

[pay]Pattern notes.
Thursday’s session-long rally went a long way…17 handles, to be exact, peaking at 1300’00… 24-1/2 points would also be exact, which is the gain from overnight lows… Or 12 points, the gain since gapping up at the cash session’s open. Any one of those would be correct, and every one of those would miss the point. Thursday’s rally went a long way to requiring new relative highs up to 1326’00 before ultimately returning to last week’s lows to retest, probe and break them.

The difference between up and down can be reduced to a day or two. Volume normally evaporates around three-day holiday weekends. There’s fewer participants, making it difficult to generate sponsorship for reversing a trend. Despite S&Ps trading softer during the past several weeks, the trend had not yet reversed down by closing under the 1260’00 area. The corrective bounce found new life by waiting out sellers.

The same tactic “powered” the last leg of a corrective bounce into last December’s highs, and also this year’s larger rally off of March’s lows. Volume’s pace has been declining steadily for at least a month while S&Ps have ranged widely – sideways, but widely. Thursday’s gap up and session-long rally seemed like the work of broad buying efforts, but it was due more to the lack of selling efforts.

Thursday’s steadily rising channel makes higher highs likely to test 1307’00 Friday. Any higher high that starts not by gapping up, and ends in negative territory, would go a long way to undermining the potential to 1326’00. Buyers will have milked their low-volume sob story dry. Otherwise, closing above the 1307’00 area would signal the balloon was still inflating.

Indicators and Internals.
The ratio between NYSE advancing and declining issues was 4:1, and not much higher between up and down volume. Relatively low volume spares the market from any obligation to reward sellers for their relative productivity. RSI and MACD spent the day magnetized to their respective neutral readings, reflecting the rally’s controlled personality, or at least the lack of any opposition.

Friday’s opening setup.
Pullbacks on the way to higher highs should be short and shallow, regardless of whether the higher high is short-lived. My pre-close preference was 1297’00, just a couple of points under Thursday’s close. DELL’s big earnings miss put this pullback limit under pressure, but it has so far held. The pressure would increase exponentially if a break were maintained under 1295’00. This would simultaneously break under Thursday’s last relative low, and its last three relative highs.

Seems like a lot of buying effort being expended already just to look tough in the face of DELL’s surprise. Stiff upper lips will be needed during the morning’s litter of econ reports at 8:30, 9:45 and 10:00. But the bond market’s early close and the holiday weekend could make the afternoon a desolate place.[/pay]