Market Wrap

[pay]Pattern notes.
Obviously golf’s US Open playoff was a factor in Monday’s trading. Tiger Woods and Rocco Mediate were a distraction, but did that distraction delay the inevitable decline, or suppress what could have been a blow-out rally?

I’m only half-kidding. The market is in large degree a function of the events that captivate its participants, but the Open doesn’t captivate enough. It wouldn’t have prevented trending from being obvious Monday if trending wanted to begin at all.

Lehman’s earnings are a more interesting answer to this question. Crude Oil’s opening surge and intraday reversal is also a candidate, but not as compelling to me. So this morning’s question was whether the ESu 1354’25 bias-down signal would break, and the noon hour’s question was about the 1358’00 bias-down signal. Both held.

The question going into this afternoon’s close was whether Friday morning’s high would hold as support, and it did not. Repeated probes through Monday afternoon produced only more higher highs that also failed to hold on a closing basis. Excessive optimism and ineffectual optimism haven’t yet denied this recovery from extending itself higher. And they haven’t denied that their eventual resolution will be down.

Indicators and Internals.
Monday’s cash session close was essentially even with Friday’s cash session close, so internals are moot. That’s too bad for bulls, because the spreads would have diverged positively, with the ratio of NYSE advancing issues to decliners exceeding the ratio of up volume to down volume that produced it. Technicals offered no new information.

Tuesday’s opening setup.
Does anyone expect Goldman’s earnings to disappoint. That would be a bearish surprise, but a bullish surprise isn’t likely. More chances for a surprise come from the usual Tuesday retail sales reports, as well as PPI at 8:30 and Industrial Production at 9:15. Every tick, swing and pattern will be considered as either further inflating the optimistic bubble, or else deflating it – the latter unlikely to be without drama.[/pay]

[pay]Pattern notes.
The decline’s long-standing target was ESu 1337’50, which was met finally Wednesday by a last-hour break at its last-minute low. It was retested Thursday during the last hour’s brief dip into negative territory. The target has so far held two tests through more than two days that produced two higher highs. So, can we call this a durable bottom?

My last post Friday detailed much of the argument, concluding with the “ineffectual optimism” label. Then the market rallied to new session highs. S&P cash closed at the session high, and S&P futures added more than 1 point to the cash session’s gain. This didn’t prevent slipping 5 points to close back under the morning’s high. This is just more “ineffectual optimism” unless rejected by new highs maintained through Monday’s cash session open.

Actually, the S&P E-mini alone added more than 1 point after Friday’s cash session close. The main contract peaked 50 cents lower, reflecting higher optimism among retail participants. The mini then fell to 1357’75 while the main contract reached only 1359’50, which might foreshadow the relative reaction to this excessive optimism. It’s the same optimism that we monitored all the way down, the same optimism that undermines the credibility of any bottoming already attempted, and the same optimism that makes the current bounce suspicious.

We’ll know more at Sunday night’s Globex open and then after Monday’s cash session open. But we’ll be looking for signs of whether Friday afternoon’s rally was overly-optimistic, or whether the optimism hasn’t yet reached excessive levels.

Indicators and Internals.
Friday’s internal spreads were wide, which is understandable considering that the entire session was spent in positive territory and closed at session highs. But 4 times more NYSE up volume than down produced 3 times more advancing issues than decliners. Monday’s session is obligated to reward Friday’s sellers for their relative productivity unless an immediate recovery above Friday’s highs were maintained through the 10:15 timing window.

Monday’s opening setup.
All of Friday afternoon’s gain doesn’t need to be rejected for sellers to prove they are retaking control. But a gap left outstanding back to Friday’s close will want to be filled unless the 10:15 timing window were exited under 1353’00, and preferably under 1351’00. The “Friday Factor” raises this possibility since both the open and closing 15 minutes trended down, making Monday’s opening 15 minutes likely to duplicate. Rallying instead would overcome the Friday Factor, and probably also neutralize the obligation to reward Friday’s sellers for their relative productivity.[/pay]

[pay]Pattern notes.
A close above ESu 1342’50 would have signaled that Thursday’s new low had formed a durable bottom by holding its retest of Wednesday’s low. Wednesday’s low is relevant because that’s when the decline’s long-standing 1337’50 target was met. Thursday’s new low retested this target, and also tested a new low that had printed overnight.

Every probe under prior lows weakens the support it can offer against future probes, so it is not enough simply to close back above them – the close must be so far away from the lows as to neutralize any magnetic attraction to retesting them. A close above 1342’50 would have accomplished this, but S&Ps were still testing this level at the cash session close. The futures close was no clearer.

I noted at the time that this wouldn’t prevent an attempt to extend higher, and overnight price action since then has ranged widely between 1339’00-1347’25. Currently the range’s upper-end is being attacked again. But Thursday’s failure to signal a clear bottom has done two things. Thing number one raised the bottom’s standard of proof to at least 1353’00. Thing number two made a probe of new lows likely.

It is possible that Thursday’s probing and recovery did form a durable bottom. A strong rally Friday on much higher volume would be difficult to argue against. And a durable bottom here would mean a multi-week rally back into the 1400‘s above May’s prior highs (i.e. “multi-century mark”). But since no bottom here and now could mean a “crash” is developing, I want to see more evidence that buyers are in control before I become too bullish.

Indicators and Internals.
45% more NYSE up volume than down volume produced only 10% more advancing issues than decliners. Friday’s session is obligated to reward Thursday’s sellers for their relative productivity. Meanwhile, the 3-minute RSI was oversold and accompanying S&Ps to session lows that all but require a retest.

Friday’s opening setup.
CPI is due one hour before the cash session open at 8:30 and then Consumer Sentiment is due 30 minutes after the open at 10:00. Both are high-profile economic data, and the latter’s post-open timing can accelerate or reverse any initial trending underway. A firm or higher open could be very different less than an hour later, regardless of how much strength is displayed. But this being a Friday, the morning’s bias signal is likely to persist well past the noon hour. And at this stage of the decline, the close could be significantly above or below yesterday’s.[/pay]

THE FRONT-MONTH ROLLS TO SEP (U) AT TODAY’S OPEN

[pay]Pattern notes.
The Globex open dipped 1 point under the ESm 1335’00 target, and then firmed several points. A narrow range through most of the night started trending up until probing the prior target of 1342’25 by 1 point. This put S&Ps back above yesterday morning’s 1340’00 low, which was also a target (intraday) and which is now being tested as support.

Yesterday afternoon’s eventual break lower was hard fought through several false starts that barely managed to meet the target before the close. And after all of that, there was only a small momentary lower low before buyers tried taking control again. This degree of optimism is amazing, and it suggests that the bottom has not been seen. Either the bounce underway will reverse back down to test yesterday’s low, or else a new downleg of greater proportion will begin.

Indicators and Internals.
Optimism isn’t limited to price action. I am also amazed at the narrow ratio between internal spreads. The spreads themselves weren’t narrow – 4.3 times more NYSE declining issues than advancing, on 5.6 times more down volume than up volume. Thursday’s session is obligated to reward Wednesday’s buyers for their relative productivity, but that was relatively small compared to the norm for sizable declines nearing an end. In this case, any relief is likely to be retraced.

Thursday’s opening setup.
The chance for a morning rally attempt largely depends upon whether the market can maintain its overnight recovery of yesterday morning’s ESm 1340’00 (ESu 1342’50) lows. Preserving the recovery to allow a gap up would be most likely to actually extend up to 1349’00-1350’00 (ESu 1351’50-1352’50). Otherwise, it will be difficult to resume the decline today, since last night’s initial narrow ranging built up significant support around 1338’00 (ESu 1340’50). Sellers might need to time to chip away at it, unless they can spike through it how yesterday morning’s sellers managed to cut through Tuesday morning’s Globex lows. The calendar is loaded with reports this morning and tomorrow.[/pay]

[pay]Pattern notes.
Tuesday’s late dip attacked the afternoon’s lows, and then extended lower after the cash session close. In the eight hours since then, S&Ps have gyrated a couple of points either way around Tuesday’s close, twice probing under Tuesday afternoon’s lows. Neither dip has extended down to fulfill the required retest of Monday’s night’s “new Globex trend extreme.” But neither has Tuesday’s late dip recovered.

If not for the new lows overnight, Tuesday’s price action would have been an inside day, trading exclusively within Monday’s range. But optimism kept buyers too impatient to allow the cash session to dip, and kept sellers to fearful to force it. The overnight drop had similar optimistic characteristics. This is not the stuff of durable bottoms.

While not the stuff of bottoms, the market could stuff a bounce into the picture before resuming the decline. Delaying new lows much longer would have little choice but to exploit Monday and Tuesday’s basing with a more substantial recovery attempt. Regardless, the eventual resolution remains down.

Indicators and Internals.
30% more NYSE down volume than up volume produced twice as many declining issues as advancers. Wednesday’s market is obligated to reward Tuesday’s sellers for their relative productivity. Meanwhile, MACD & RSI haven’t been very volatile, which is unusual, making volatility likely to increase very soon.

Wednesday’s opening setup.
Some lower profile econ reports are due Wednesday morning, but the bigger news will be the Beige Book data at 2:00 ET. Whether in anticipation of or in reaction to the afternoon’s event, meeting this decline’s target(s) down to ESm 1342’00 and/or 1335’00 would be the stuff of durable bottoms. [/pay]