Market Wrap

[pay]Pattern notes.
Seasonal bullishness can appear around a three-day holiday weekend, as participation thins out, making it difficult to generate sponsorship for trending. This makes the rally into Wednesday’s high interesting for having started so soon. Not from Tuesday afternoon’s low – although it is also interesting Tuesday’s sellers didn’t trigger the next downleg right then and there. The rally into Wednesday’s noon hour peak really began 7 hours earlier and 20 points lower.

I expect the seasonal bullish effect either to be very strong, or else inverted. If very strong, then Thursday’s open will already be at or above Wednesday’s 1285’00 highs, intent on filling the gap back to Friday’s 1292’50 close – probably higher intraday. If the bullish effect is inverted, then it has already ended, and Thursday’s open should already be slipping under 1278’00, on the way to 1267’25.

Unless Thursday’s close exceeds last week’s highs after filling the 1292’50 gap intraday, Friday’s session probably won’t trade too much higher before the weekend. Closing above last week’s highs could instead exploit the holiday’s thinner volume and possibly retest the month’s highs. We’ll see. Wednesday night’s Globex open certainly didn’t seem to mind that FNM and FRE haven’t yet gotten their heavily-rumored government bailout(s), and that’s somewhat bullish. But I wouldn’t hesitate shorting a support break if it appears.

Indicators and Internals.
The last oversold 3-minute RSI reading was neutralized minutes later at Wednesday’s last relative low. The 1-minute RSI positive divergence there has already been productive in the bounce it produced. Technically there is no unfinished business either above or below. Internal spreads reflected sellers more productive than buyers. But total volume has already started slipping ahead of the holiday weekend. So Thursday’s market isn’t necessarily obligated to reward Wednesday’s sellers for their relative productivity.

Thursday’s opening setup.
Jobless Claims and GDP at 8:30 might be called upon to incite trending. I’ll be interested in their timing, and whether S&Ps are probing Wednesday’s highs at the time, pulling back after piercing the highs, or already dipping down from Wednesday’s close. Afternoon volume isn’t going to get any better, and the dwindling participation makes it difficult to start or sustain trending. So any trending needs to be underway early if at all.[/pay]

[pay]Pattern notes.
Will S&Ps want to rest after Tuesday’s intraday round-trip in a 26-point intraday range? That doesn’t count the last hour’s 8 point rally into the close. Monday’s 8-point gap down was just the warm-up to a 16-point follow-through into noon, and an additional 5 points lost before the close. Last week’s last two sessions were volatile, too.

A rest would seem to serve buyers, giving bottom-fishers a second chance to buy 1260’00-1270’00. But no bullish pattern required a return to last week’s lows, so this week’s buyers aren’t relevant. Resting here would serve sellers, allowing them to refuel as weak buyers expend their energy.

Buyers could threaten to gain traction for filling the gap back to Friday’s close 20 points higher, an attraction that is probably keeping alive bullish hopes. I might even join that crowd much the same as last week when sellers slow-played their Aces too long. But the next downleg could be just one frustratingly narrow morning away from starting if Wednesday’s open hasn’t budged much from Tuesday’s close.

Indicators and Internals.
Lopsided internals might have required Wednesday’s session to reward Tuesday’s sellers for their relative productivity if total volume were any higher. But MACD & RSI did diverge negatively into the last-minute highs of the last-hour rally.

Wednesday’s opening setup.
If Wednesday’s session intends to trend – or even attempt to trend, as in probing either end of Tuesday’s range – then the open must almost gap beyond either end of Tuesday’s range. Either above 1274’75 or under 1267’25, and extend at least another 3 points before resting. Opening any shallower would more likely hold a test of either level, possibly into the afternoon. Pre-open econ reports are essentially limited to Durable Goods at 8:30.[/pay]

[pay]Pattern notes.
Thursday’s last action was to dip back to Tuesday and Wednesday’s highs, retracing the afternoon’s gain. While that’s not enough to force immediately lower prices, it does undermine any rally attempt. The buyers that produced Friday’s gap up discovered this problem Monday, although they probably don’t know exactly what went wrong. The day’s news wasn’t really anything new, it just met the market after rallying off an unstable base.

There is a similar lesson in Monday afternoon’s reversal back into the range after S&Ps tried breaking to a new extreme. Thursday’s break was a rally attempt, but the important difference is the timing of each. Monday’s break started during an irrelevant timing window after 3:30. Recovering from an irrelevant break is also irrelevant. Thursday’s higher highs first printed during a relevant window, so its failure was also relevant. So relevant that it doomed Friday’s gains to failure. But a break lower Tuesday would not be so encumbered.

After probing above Tuesday and Wednesday’s highs, any drop was going to target a 61.8% retracement back into their range. That was 1267’25 and it was influential Monday afternoon. It might be influential again after an early break to 1260’00-1262’00 Tuesday, whether or not recovered. But if Tuesday’s open is firm or higher, then the sell-off will be difficult to resume from above 1267’25, but easier from below.

Indicators and Internals.
NYSE down volume was 4.6 times greater than up volume, but produced only 3.6 times more declining issues than advancers. Had total volume increased to an above average pace, then Tuesday’s session would have been obligated to reward Monday’s buyers for their relative productivity. Instead volume was relatively light, which makes some sort of lower low likely.

Tuesday’s opening setup.
FOMC minutes will be released at 2:00 Tuesday. It’s not quite the gravity of an FOMC decision or Beige Book (next week) but it induces volatility nonetheless. Early trending might have difficulty getting too far if it doesn’t get far early enough, before price action becomes all but paralyzed by anxiousness ahead of the news.[/pay]

[pay]Pattern notes.
The middle of last week’s trading -Tuesday through Thursday – had an opportunity to extend the prior week’s drop in a big way. Several opportunities, actually. The longer the delay, the bigger the void where selling pressure was supposed to appear. The market sucked in sellers at Friday’s open to produce a gap up and some follow-through.

Whether Friday’s opening gain extends higher depends largely upon Monday’s open, and whether it quickly rejects Friday’s gain. The breakout’s chances would have been much better had S&Ps tried and failed one more time to resume the decline. Just firming Friday would have helped a rally’s chances. Instead Friday’s gap up was optimistic. And the optimism was ineffectual because it expended buying pressure without recovering any relevant level.

This is illustrated in the nearby chart. The consolidation off recent highs led to Friday’s gap up, highlighted in red. Friday’s high peaked at the consolidation’s 61.8% retracement. Interestingly, last week’s lows (at the ever-relevant 1260’00 area) retested the earlier consolidation’s last low (also at ~1260’00) so a third test is all but assured to break lower. But a third test isn’t assured if Monday’s open doesn’t hesitate to extend Friday’s gains.

Indicators and Internals.
Volume wasn’t unusually low for a Friday, only for a breakout. The reduced participation may have inhibited the gap up’s follow-through. But the open gapped up nonetheless. This requires another immediate show of strength Monday if Friday’s strength was valid. Otherwise it probably wasn’t.

Monday’s opening setup.
Sellers don’t need to retrace all of Friday’s gain to reject it. But no retracement at all through Monday’s open would suggest S&Ps might print 1303’00 (+/- 3 points) before sellers are able to reject anything again.[/pay]

[pay]Pattern notes.
Thursday’s session was almost an inside day until its last 90 minutes. And 60 minutes of that was spent retracing all the first 30 minutes’ gain. Did sellers absorb buyers, or did buyers chip away at resistance? Internals (discussed below) suggest the former, but so does the close back under Wednesday’s high. This was after filling an outstanding gap at higher levels, neutralizing any magnetic attraction to rising prices that it might have had.

None of which is a sell signal. Tuesday’s gap down to new lows, Wednesday’s two failed intraday rallies, Thursday morning’s failed bounce… Nature abhors a vacuum, and that’s what remains when sellers repeatedly push S&Ps back down to support, but don’t convert that into a break to new lows. Buyers could be sucked into the void left open by sellers not exploiting these vulnerabilities without further delay.

Indicators and Internals.
NYSE up volume was 5% greater than down volume Thursday, but declining issues outnumbered advancers by 30%. This is a negative divergence that obligates the following session to reward sellers for their relative productivity. S&Ps probed positive territory for only a small portion of the day, and total volume declined, so the internals aren’t very predictive in this instance. But the internals certainly don’t reflect accumulation. This means the afternoon’s probe above Tuesday and Wednesday’s highs was absorbed by sellers, and didn’t chip away at resistance.
Friday’s opening setup.
No econ reports are due. This being a Friday, the morning’s bias is likely to persist past the noon hour. If the session intends to rally, then it should begin by gapping up above Thursday’s 1282’00 high. Regardless, I would be a little skittish shorting opening strength at any level that hasn’t yet retraced under a pullback limit. But I would be ready since buyers have failed all other opportunities this week. Failing one more surge at Friday’s open could end the week with sellers compensating well for lost time.[/pay]