Market Wrap

[pay]Pattern notes.
Overnight tests of Wednesday’s low all stopped within 1 tick of the ESu 1244’25 bias-down signal. The 1252’00 bias-up signal held repeated tests as resistance. That is, until a dip to 1247’50 suddenly reversed up, back to and through the 1254’50 target of yesterday afternoon’s steep drop. The retracement has already extended up to this morning’s 1259’00 bias-up target.

Extending this overnight rally above 1261’00 would start making a retest of Wednesday’s 1278’75 high likelier than not – it wouldn’t yet be targeted, just likelier. And Wednesday’s high probably won’t be retested unless a rally leg targeting 1360’00 is underway. Meanwhile, this morning’s 1259’00 bias-up target has been satisfied, along with its buying pressure.

Three news items accompanied the overnight surge: The BOE interest rate announcement, DOW buying ROH, and upward guidance from WMT. Other retailers are offering guidance before the open, so there will be opportunities to confirm or undermine WMT’s news. Jobless Claims is due at 8:30.

Indicators and Internals.
The 3-minute RSI was overbought at 1259’25 and requiring any pullback to recover and retest the high. A negative divergence there would likely produce a short-entry setup. Wednesday’s internal spreads were lopsided and sellers were much less productive than buyers, but a gap up this morning would neutralize any obligation to trade higher.

Thursday’s opening setup.
Absent too much of a reversal down during the next two hours, the cash session’s open will gap up and leave new unfinished business (the gap back to yesterday’s 1248’00 close) at lower levels. This will be added to Tuesday’s pre-open Globex trend extreme as being another anchor around the market’s neck to inhibit and limit recovery attempts. A pullback to only 1253’00-1254’00 could form a good base to launch a rally back to overnight highs.

PROGRAMMING NOTE: I will be unavailable today between 11:15-2:00. The site (both blog and charting room) will not be updated during that time. [/pay]

[pay]Pattern notes.
The last hour’s ESu 1253’50 bounce target didn’t hold back the rally for long. One more upleg took the more obvious form of a short-squeeze. But the 24-point rally off of session lows stopped 1 tick short of filling the gap back to Thursday’s last close, where a 13-point drop ended the day.

The recovery failed to close above the decline’s 1263’00-1265’00 prior lows that would have formed a “Gotcha!” setup. A close 10 points higher above  the morning’s high would have formed a Pivot reversal. Either buyers left something on the table to attract price higher overnight and tomorrow, i.e. the “crazy like a fox” setup, or else they missed the chance to avoid another downleg well under 1244’00-1247’00, i.e. the just plain crazy setup.

Indicators and Internals.
Overbought 3-min RSI accompanied the afternoon bounce’s high at 1265’00, so its retest is required. S&Ps have already pulled back 13 points, so RSI is likely to diverge negatively if 1265’00 were retested. Internal spreads were evenly distributed, so the market doesn’t owe either buyers or sellers for any relative productivity Monday.

Monday’s opening setup.
I think it would be a silly waste of energy to try shorting Tuesday’s market if Crude Oil follows through on Monday’s threat to break lower. In that instance I would rather focus on lightening long positions into valid resistance levels, and then loading up on pullbacks to appropriate levels. By the same token, not repeating the recovery attempt would add injury to the insult of Monday’s failed Gotcha setup, at perhaps the most vulnerable point in the charts for a substantial new downleg to begin.[/pay]

[pay]Pattern notes.
Thursday’s intraday range of 22 points doesn’t begin to describe the day’s price action. Probably by a factor of three, the range understates the actual mileage covered during two visits to session highs and an interim drop to new lows. And despite the volatility, Thursday’s close was essentially unchanged.

The numbers also don’t recognize that S&Ps printed new lows for the year, or that the retest of session highs was preceded by a test of the ESu 1257’00 target. Each development satisfies its own contingency of selling pressure. I suspect that won’t be enough to form a durable bottom, but it requires either beginning the process, or else extending the decline accelerated pace.

Indicators and Internals.
Thursday’s NYSE down volume was only 35% greater than up volume, yet it produced 90% more declining issues than advancing. The shortened session and flat close mitigate the internal distribution somewhat. But shortened session or not, sellers seem pretty productive compared to only 45 minutes spent in negative territory. Not surprising since oversold RSI at Thursday morning’s low requires its eventual retest.

Monday’s opening setup.

Friday’s Globex session fell back to 1257’00 (and closed there), perhaps giving a preview of Monday’s price action. A retest of the low and its recovery back into positive territory – preferably from new lows at 1244’00-1247’00 – would make a more convincing bottom than would an immediate rally at Monday’s open. Unfortunately, the new lows would look a lot like the beginning of a steeper, deeper decline, which continues to be a very real risk. I’ll be in the charting room Sunday night with observations, and in the blog with updated comments.[/pay]

[pay]Pattern notes.
Usually overnight price action is unremarkable ahead of the Employment Situation report. Last night’s pattern didn’t stray very far from the template. Yesterday’s drop had stopped upon touching Tuesday’s ESu 1261’00 low. A 7-point gain overnight was retraced entirely – and not 1 tick more – then recovered back to new session highs at 1268’50. That didn’t last long either, as S&Ps have settled in the 1263’50 area.

Yesterday’s complete retracement of Tuesday’s recovery isn’t bullish. Coming ahead of the Employment report, the round-trip’s bearishness might only be a criticism of Tuesday’s intraday recovery. That might seem like a distinction without difference since Tuesday’s recovery was largely the basis for any bullish posture. But the difference between extending Wednesday’s drop instead of Tuesday’s drop is the opportunity for a near-term bottom.

It’s not an opportunity that will last long, and that’s not entirely because of the shortened session (today’s close is at 1:00). Knee-jerk selling on this morning’s news could bottom credibly from 1257’00 or 1251’00. There are lower targets that would also allow a bottom, but too little time to expect their recovery. Knee-jerk buying would target either 1271’00 or 1277’50, but only ensure a more solid downleg to come.

Indicators and Internals.
Yesterday’s wide internal spreads were a little lopsided, so there is some obligation to reward Wednesday’s buyers for their relative productivity. MACD & RSI have largely settled into mid-range after fulfilling existing signals and divergences, awaiting some volatility to create another obligation.

Thursday’s opening setup.
The cash session open is one hour after the Employment report, so its reaction could cause the open to gap one direction or the other. In either case at this stage of the pattern, it is a gap that will want to be filled. Trending might already be underway ahead of the Employment report in the wake of this morning’s 7:45 ECB rate announcement, whose effects the report might exacerbate or reverse. And one more report is due at 10:00 just to keep us guessing.

The environment couldn’t be more fluid, given the 3-day holiday weekend, shortened session, unusual timing for today’s report, and sitting at the lows after having retraced all of a substantial recovery attempt. I can’t imagine there not being a probe of new lows, whether or not sustained, but this half-session could be more volatile than some weeks.[/pay]

[pay]Pattern notes.
Tuesday’s lows probed prior intraday lows and recovered to close back above them. This single innocuous statement might be the most powerful bullish factor inviting a rally. If buyers are not obviously in control at Wednesday’s open, then the statement’s threat to sellers might be only that, a threat. The year’s lows still require being tested, if not also broken by a new downleg. But Tuesday’s recovery from probing prior lows has opened the door to a detour from new lows, if that detour is taken right away.

The close could have been more convincing by trading above ESu 1283’00 long before the session’s last several minutes, instead of only firming. A gap up to or through Monday’s late-afternoon 1289’00 high is likely in a bullish scenario, and not simply a flat open that gradually trends higher. Sellers must force Wednesday’s open to gap under 1279’00 to reject Tuesday’s last-minute firming.

The rally potential isn’t so much a function of what buyers are doing right, because it’s not as if any meaningful resistance has been recovered, let alone attacked. And it’s not even about what sellers are doing wrong, at least not initially, because major support levels are being challenged. The bullish potential is due to sellers not being able to maintain the early chart damage, repairing the damage with a recovery that opens the door for buyers to walk through.

Indicators and Internals.
Part of my expectation for Tuesday’s sell-off was based on Monday’s internal negative divergence. Well, Déjà vu. Wednesday’s NYSE down volume was only slightly ahead of up volume, but the spread between declining and advancing issues was not narrow. Wednesday’s market is obligated to reward Tuesday’s sellers for their relative productivity. The obligation is rendered moot by gapping above the session high, which shouldn’t be too difficult since Tuesday’s close was pretty much its high. RSI diverged negatively as S&Ps gained further after the close. These aren’t signals, but these are problems that buyers need to absorb.

Wednesday’s opening setup.
The econ calendar offers several glimpses into what Thursday’s Employment Situation report might look like. My own assumption is that it might be stronger since it won’t include the anomaly of students hitting the street for summer jobs, freeing the Fed’s hands to hike rates, lift the $USD and hurt commodities. This scenario is more bullish than expecting quarterly earnings lift stocks. But volatility should start evaporating again into the afternoon ahead of Thursday’s report, which might then be the week’s last bit of fireworks.[/pay]