Market Wrap

[pay]Pattern notes.
Wednesday’s pre-open surge to new highs and the post-open recovery to higher highs meant surprisingly little to the afternoon crowd. The Beige Book reaction was remarkably calm after the obligatory knee-jerk reaction. Earnings after the close haven’t had any further effect.

After retracing the opren’s surge through the balance of the morning, the afternoon defined itself by repeatedly testing ESu 1278’00 as support. This level is also Tuesday’s close, and its retest should have sufficed for launching a new session high once anxiousness ahead of Beige Book had passed. Wednesday’s session failed to extend not only the surge from Wednesday morning, but also from Tuesday afternoon.

The hesitation undermines the durability of any subsequent rally attempt. And it happens that Wednesday’s 1291’25 high fulfilled multiple targets, independently calculated from patterns dating back to last week’s lows. Wednesday’s pullback stopped short of signaling that momentum had reversed down, but buyers certainly didn’t gain traction on the day. It takes a lot to construe a new high as being bearish, and Wednesday’s session nearly did it.

Indicators and Internals.
Two times more NYSE up volume than down volume produced a relatively narrower ratio between advancing issues and decliners. That’s in-line with the price action, but it still obligates the market to reward Wednesday’s sellers for their relative productivity. Also attracting price lower is two oversold 3-minute RSI readings whose price lows have yet to be retested.

Thursday’s opening setup.
Jobless Claims and Existing Home Sales highlight Thursday’s econ calendar. The latter comes 30 minutes after the open. The quarterly earnings onslaught also continues. If the reaction to Wednesday’s ineffectual optimism doesn’t immediately drop under its 1275’00-1276’00 lows, sellers probably still won’t influence Thursday’s session. That might even allow one more surge, perhaps up to 1303’00. But no follow-through from Wednesday’s unstable base should be lasting.[/pay]

[pay]Pattern notes.
Sellers stopped pressuring price down, just when it had become critical for them to continue. Buyers didn’t exactly overwhelm sellers – at least, not at first. The door was opened for sellers to retake control, they failed, and the vacuum sucked in buyers to take their place. Back above ESu 1263’00 didn’t immediately extend higher, but it eventually did, adding 15 points in 45 minutes to test 1278’00 at the close.

Buyers that can be “sucked in” aren’t the most durable kind. They were stretched pretty thinly into the close, optimistically ahead of several relatively major earnings announcements. The development’s bullish aspect is that it created a wide margin for a pullback to prior highs without damaging the breakout – almost 11 points off the high, down to 1267’25, before Tuesday’s late surge is invalidated into irrelevance. Even then, there is room to 1258’00-1260’00 before sellers gain traction to reverse the trend down.

Any lesser selling pressure is going to leave a gap outstanding back to Tuesday’s close, sort of a safety-tether to help guide a pullback to recovery. There is a template that would allow Tuesday’s higher highs to be maintained through Wednesday or retested after a pullback, and yet still see the market in decline next week. That would be too bad, because that template at this stage would reinstate the “crash” pattern.

Much depends upon buyers giving back little ground for little time. The rally’s goal will be to limit the retracement to be either too shallow to gain traction, or to be inappropriately timed and easily recovered before a relevant timing window.

Indicators and Internals.
The 3-min RSI at Tuesday’s high was overbought, but not as overbought as the high several points and several minutes prior. Consequently, it was only likely to be retested, but its retest is not required. The Globex open popped up near enough to the high to qualify as retesting it by proxy, so any further rallying won’t be due to unfinished business above.

Wednesday’s opening setup.
Earnings after Tuesday’s close from ETFC, WM, and YHOO were surprisingly disappointing. The immediate effect only took back 5 points. Then after the close these issues reversed up (WM duplicating WB’s action from Tuesday, but not waiting for the open). The Globex open retraced most of the last-minute dip, and extending above the cash session’s high should rally further. Beige Book comes out at 2:00 Wednesday, hitting an environment that is much different than similar events recently, and likely to maintain the increased volatility.[/pay]

[pay]Pattern notes.
The session following expiration tends to be a different version. That seemed very unlikely when S&Ps were gapping up at Monday’s open. But well before close it became obvious that the same frustratingly narrow ranging would price action. Except for failing to maintain a probe of new highs and then chipping away at support, the session did very little.

Then came disappointing earnings or guidance after the close from AAPL, AXP and TXN. S&Ps gapped down 3 points and plummeted another 9 points down to ESu 1249’50. This isn’t the lowest since Thursday fulfilled the corrective bounce target above 1260’00 – that night’s range fell to 1240’00. But this is the lowest since Friday’s retest of the target and Monday’s higher high. If this rejection isn’t itself rejected through Tuesday’s open, then the trend will have reversed down.

I would still like to see last week’s 1200’75 low retested down to 1194’00. It’s too soon to predict whether a bottom will form there, but that would be the best chance buyers have had in the past several dozen points. If they don’t gain traction there, then the next leg down is dramatic.

Indicators and Internals.
Monday’s NYSE up volume was only 10% greater than down volume, but advancing issues numbered about 70% more. Although this would normally obligate Tuesday to reward Monday’s buyers for their relative productivity, that becomes moot when gapping out of the range. A lot depends upon whether the post-close losses are recovered. The 3-min RSI got oversold quickly and has stayed oversold, so a sustainable low isn’t yet likely here at 1249’00.

Tuesday’s opening setup.
Under 1248’00 would confirm the break’s momentum remains intact, and next targeting 1235’00. More earnings are due before Tuesday’s open, so more opportunities to change perceptions. AAPL, AXP and TXN earnings weren’t good, and each has its own ripple effects that justifiably magnify the bad news. Other earnings reports were comparatively better, so a recovery can’t be discounted. [/pay]

[pay]Pattern notes.
The nearby chart depicts last Monday’s opening gap up in a downtrend and Friday’s close above Monday’s high. If anything makes this impressive, it is the week’s interim new low. The setup is a “pivot reversal” when it appears on a single daily bar, and it is often immediately productive, but rarely lasting. The opposite is often true for weekly setups – the recovery might not extend higher without retesting the low, but buyers are trying.

Meanwhile there is follow-through from Friday’s session to be concerned with. A gap above Thursday’s ESu 1263’00 prior high would need to be maintained through 10:15 to avoid jump-starting a drop back to Thursday’s 1240’00 lows. Maintaining a gap up would likely trend up throughout the day. But the more likely open is flat to lower, which would generate little interest for trending before Monday afternoon, or later.

I would like to see a flat to lower morning that attracts sellers into the afternoon, falling further on Tuesday. The bullish setup Wednesday would be compelling, with the afternoon’s Beige Book helping to trigger a brief probe of new lows that lets a bottom form. We all know the risk, of course, which is that new lows attract new sellers. But the bigger risk would be rallying much further first, and eventually attacking last week’s lows as part of a new downleg.

Indicators and Internals.
Internal spreads were lopsided Friday with 60% more NYSE up volume than down volume producing 20% more advancing issues than decliners. That’s not very predictive for an expiration session or an inside day, but it certainly doesn’t reflect accumulation.

Monday’s opening setup.
The week doesn’t often start with an econ report but this one does, LEI at 10:00. The timing tends often either to accelerate or reverse any initial trending underway. Overnight price action should be very revealing of what sort of volatility to expect Monday. Currently I expect very little, but that’s not likely to be the case if S&Ps trade overnight beyond either end of Friday’s range.[/pay]

[pay]Pattern notes.
Thursday’s high fulfilled the ESu 1260’00 area corrective bounce target discussed Wednesday morning. The 11-point drop from there wasn’t going to extend the extra 2 points before the close to fulfill that leg’s 1249’75 target, and the rally wasn’t going to resume either. So the last hour only ranged back to the target area, and waited for GOOG earnings. S&Ps reacted at the Globex open by gapping down to the unmet target.

At least 7 points more have been lost through midnight to 1242’00. That’s 1 point from Thursday’s low, and a complete retracement back to support that didn’t need to be retested – both are under Wednesday’s prior high close, and Thursday’s low had already successfully retested the overnight range. Opening much lower than this Friday morning would trigger an abrupt end to the corrective bounce from Tuesday’s lows.

If Friday ends without having given back much ground, then the 1260’00 area corrective bounce target is likely just the correction’s first upleg, with more to come next week.

Indicators and Internals.
MACD & RSI diverged positively into the overnight test of 1242’00 which could preface a 3-point bounce. If not, then Friday’s open is probably being greeted at much lower levels.

Friday’s opening setup.
Before Thursday night’s Globex drop, I was halfway expecting Friday to range narrowly. Not anymore, not if this overnight action persists. Besides the technical divergence noted above, several things might change the landscape before Friday’s open, most notably earnings and expiration. (No econ reports are scheduled.) But a gap up maintained above the 1250’00 area would again be likely to range narrowly through the day – perhaps more likely for having absorbed the overnight selling. Otherwise, I would halfway expect to end the week at new lows.

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