Market Wrap

[pay]Pattern notes.
Is it, or isn’t it? Wednesday’s session-long rally was relentless and substantial. It was the first to close above a prior session’s high in four weeks. It seems like a breath of fresh air because it stands out so starkly from its predecessors that this standard has become very easy to meet.

Wednesday’s cash session closed above every higher prior low it had probed intraday (the last being July 7’s 1240’75 low), signaling that buyers weren’t losing any traction they had gotten from their intraday gains. The critical part of that recovery was retraced after the cash session close and more deeply overnight down to 1238’00. The quick bout of pessimism suggests that buyers hadn’t become too cocky to sustain higher highs. Indeed, the overnight dip has already been recovered to back above Wednesday’s high, so at this point only a close today under the overnight low would signal the bounce had already ended.

The bounce can extend further to the ESu 1260’00 area, but any higher would stretch buyers too thinly for them to help form a bottom when this week’s 1200’75 low is inevitably retested. The quick-buck reward of rallying further would have potential to 1309’00-1314’00, but at the cost of refueling sellers for a much more brutal August slide. It’s the proverbial bird in the hand vs. two in the back of the head.

Indicators and Internals.
Well over four times more NYSE up volume than down volume produced only three times more advancing issues than decliners. The breadth of each internal makes an immediate drop unlikely, although sellers were more productive and deserve some reward. RSI has become overbought at the past couple of higher highs to help sustain the recovery attempt and absorb pullbacks.
Thursday’s opening setup.
The open is on-track for gapping up, and follow-through would threaten to probe July 3’s higher-prior low at 1251’75. It should be tested on this run, and the character of that test will help to define whether optimism is starting to get out of hand again. This morning’s econ reports are the week’s last, with two at 8:30 and one at 10:00. Favorable earnings reactions pre-market should help to maintain optimism for some weighty earnings announcements due after the close. [/pay]

[pay]Pattern notes.
The template for Tuesday’s last leg – whether up or down – called for it to trend sharply and relentlessly into the close. Market forces chose to drop instead of rally, falling 20 points in 40 minutes (from 5 points higher 10 minutes earlier) down to ESu 1210’50. The first target at 1218’00 forced the drop’s longest consolidation of almost 15 minutes.

An 8-point bounce overnight recovered to 1218’00. MACD & RSI just diverged negatively on its retest, sending S&Ps down 4 points to 1214’00. Any lower would target negative territory. Absent some sort of substantial external intervention, the decline’s momentum remains intact and next targeting 1194’00. An open above the 1218’00 area would trigger a bigger corrective bounce back towards Tuesday’s highs.

Indicators and Internals.
The 3-minute RSI was oversold at Tuesday’s 1200’75 low, requiring its retest. Apart from pattern measurements and extensions, Tuesday’s low is the only unfinished business at lower levels. Its retest won’t necessarily satisfy sellers, but the market would become vulnerable to some sort of obligatory bounce. Tuesday’s internals suggest the retest is likely, since the spread between NYSE declining and advancing issues was wider than the spread down and up volume that produced it.

Tuesday’s opening setup.
Wednesday morning’s econ calendar is highlighted by CPI at 8:30. The afternoon is highlighted by FOMC minutes at 2:00, which should be fun. In between the market might resolve unfinished business below, and EIA Petroleum data might help push Crude Oil sharply lower. If those two variables could align properly and timely, then the FOMC minutes could trigger a recovery attempt or accelerate one already underway. Otherwise closing at lower lows would put into play new targets several dozen points lower.[/pay]

[pay]Pattern notes.
Monday’s mid-afternoon highs formed a distributive pattern while behaving poorly in a relevant price range. Despite already dropping 9 points, the consequence of the mid-afternoon pattern was  a probe of new lows. However, the late timing prevented sellers from delivering that consequence

The lateness also prevented sellers from standing in the way of a 9-point short-squeeze triggered above ESu 1229’50. It was obvious in every way except for the mid-afternoon pattern’s consequence still unfulfilled, and that prevented me from playing it. Remarkably, there was still time to retrace the squeeze back through its origin to 1227’00.  The consequence of Monday’s mid-afternoon pattern, i.e.  new lows, remains very much alive.

The potential for starting a rally also remains alive, although its breathing is labored. Monday’s Trading Plan described only one scenario for making lemonade out of Monday’s lemony morning dive – probe new lows under  1225’50 and recover back above Thursday’s 1237’00 lows. New lows were probed and Thursday’s lows were recovered. But the probe was too shallow and the recovery didn’t last through the close. The miss can be recouped at Tuesday’s open, but the window starts slamming shut soon after.

Besides, I don’t know how durable a bottom or how strong of a rally could form from new lows that continue to reflect optimism better reserved for pullbacks in an uptrend. Instead, buyers are still rushing in to form steep bounces after probing prior lows by 1 or 2 ticks, if at all.

Indicators and Internals.
My internal data is preliminary and not yet confirmed as of this writing. If accurate the spread was wider between declining and advancing issues, than between the down and up volume that produced it. And total volume rose, obligating Tuesday’s session to reward Monday’s sellers for their relative productivity.

Tuesday’s opening setup.
Friday and Monday’s lows in the 1225’00 area still needs to be probed by at least several points for any durable bottom to begin. It could be probed more substantially and still recover to form a durable bottom, or not recover and form a steep decline. A gap up or immediate recovery above Monday’s ~1239’00 highs would have potential to rally  without probing lower lows first – such is the nuance of expiration week. Tuesday also offers a look at Retail sales, which looked healthy last week. But I will consider each setup and pattern as to whether it is capable of avoiding new lows.[/pay]

[pay]Pattern notes.
Are sellers losing traction? Friday’s close and open each were about ESu 1239’75. There was no lasting effect to whatever motivated the open’s 15-point gap down. This is despite gapping down, probing new lows, trading exclusively (all but three minutes) in negative territory and making a new low close. The gap down might be dismissed as only noise because it was at the decline’s prior intraday lows and not below. Ditto for the session’s 15-point loss.

This setup tends to accompany a trend’s reversal, but the exception tends to accompany the trend’s dramatic resumption, in either case by forcefully rejecting the opposite premise. The former scenario’s reversal begins almost immediately with a close (if not gap) above the setup, Friday’s 1258’25 high. The latter scenario’s dramatic resumption would gap under Friday’s 1225’50 low, but almost any delay in rallying would mean buyers hadn’t gained traction and that sellers’ didn’t need new traction to maintain control. Perhaps the only delay to resolve bullishly would be to recover from another probe of new lows.

A bottom here would leave behind no unfinished business below. Even in the event of gapping up Monday, the resulting gap back to Friday’s close would not require being filled – not if Monday’s session were to maintain a gap above Friday’s highs. This is as a function of the particular pattern and its appearance going into the weekend. But it must be rejected coming out of the weekend to avoid resuming the trend with a vengeance.

The opportunity for a reversal is always offset by the opportunity to resume trending. Missing this opportunity to reverse sharply higher would default to falling sharply instead. Sellers didn’t gain traction Friday, but neither did buyers. And one or the other will be well-rewarded for being the first to fill the vacuum.

Indicators and Internals.
Sellers traction was undermined Friday also by 3 times more NYSE down volume than up volume producing only 2 times more declining issues than advancers. This tends to obligate rewarding Friday’s buyers for their relative productivity,  excepted only by maintaining a gap under Friday’s lows. MACD & RSI were mixed at Friday afternoon’s surge peaked, so there is no requirement for retesting its high.

Monday’s opening setup.
Weekend fallout from Indymac and Yahoo might weigh on S&Ps at Sunday night’s open. Since Friday’s 1225’50 low produced a 33-point bounce, its retest at any other time probably couldn’t be completed by only a slim margin. A 4-point margin down to 1221’50 would be narrow enough not to be a “new Globex trend extreme” that would doom an overnight recovery attempt. Any deeper would start to stretch buyers too thinly to depend upon them repeating Friday’s bravery much before 1194’00.[/pay]

[pay]Pattern notes.
Is it, or isn’t it? I refer, of course, to whether Thursday’s new lows mark the end of the decline, or at least the beginning of a corrective bounce. And if neither, then does the decline continue to probe lower lows, or plummet in “crash” style.

My opinion hasn’t changed, because the market hasn’t changed its behavior. I continue to observe instances of rallies stopping short of accomplishing anything durable. Thursday’s intraday recovery from the morning’s new low was followed by a dive back to the morning’s low. That’s 20 points each way, three times, and still no close above ESu 1257’00 to even begin signaling that buyers were gaining traction.

Thursday’s high was probed overnight, but that would have been more impressive if the recovery had originated from new lows, and not from barely touching the morning’s low.

Tuesday’s 1236’50 pre-open low has yet to be retested during regular trading hours, leaving unfinished business below the market. But that has begun paling in comparison to the bigger problem that two new lows have come within 1 point and 1/2-point of the prior-low, respectively. That’s optimism, and that’s not the stuff of bottoms.

I am still open to the potential for a multi-day corrective bounce to begin without completing a bottom – especially with the weekend approaching, and especially if sellers aren’t in control through any relevant timing window. But that would be the first price action down here to resemble accumulation. Everything else has only managed to absorb buyers, and then disappoint them.

Indicators and Internals.
20% more NYSE up volume than down volume produced 12% more advancing issues than decliners. The spread obligates Friday’s market to reward Thursday’s buyers for their relative productivity, even if only momentarily. The spreads aren’t very wide, and they seem quite small compared to the afternoon’s last upleg.

Friday’s opening setup.
An overnight surge to 1261’75 was launched from 1250’00, where S&Ps soon returned. That was odd. The surge probed prior sessions’ highs, making it vulnerable to retest – it’s not required, but it becomes likelier as more time passes without resuming the decline. The econ calendar has two relatively low profile reports at 8:30, and then Consumer Sentiment at 10:00. The latter report’s timing often tends either to accelerate or to reverse any initial trending already underway. [/pay]