Market Wrap

Today’s “MACD & RSI” presentation will be held at 1:00pm ET as planned in the Charting Room. It will be recorded for later playback.

[pay]Pattern notes.
The two-hour rally into Friday’s close recovered from a new session low. New session lows, actually, since the last low was the retest of a low that had printed one hour earlier, interrupted by a 7-point bounce. And not just new session lows, but new sessions, actually; the afternoon lows had probed the overnight lows.

Had the recovery stopped there it would have robbed sellers of the traction that had dropped S&Ps 21 points from the ESm 1427’00 pre-open high. Instead a very late surge extended the recovery to back above overnight highs and noon hour lows, in a bid to restore traction to buyers. The last-minute ploy may have succeeded, but any immediate follow-through Monday won’t be from a very stable base. The pre-open high is a “new Globex trend extreme,” and its required retest may be all that stands before a new downleg to end this two-month rally.

The nearby chart-stack compares S&P cash to the Dow and NDX, and all have now retested the last higher consolidation’s “higher prior lows.” The relationship among each does not suggest a bottom has formed, since the recovery was clearly led by the more speculative NDX, while the bluer-chip Dow outperformed the broader-based S&Ps. There is potential to one more higher high (nearly 20 S&P points above Friday’s high). It should be met very quickly if Friday’s high is broken, and Friday’s high should break quickly if at all. The burden of proof is on buyers to exploit Friday’s last-minute recovery without delay.

Indicators and Internals.
MACD & RSI diverged positively into each of Friday’s lower lows, and each produced a bounce back above its prior relative high. So with MACD & RSI having established their credibility throughout the day, it is interesting that they diverged negatively into the last-minute surge. That alone shouldn’t be enough to derail a retest of Friday’s pre-open high, but it only makes the base that much less stable.

Monday’s opening setup.
MSFT removed its bid for YHOO Saturday, so Monday’s open will otherwise be on a sour note. So I should note that the magnetic attraction up to Friday’s high can be neutralized in the near-term by gapping under Friday’s ESm 1406’00 low. The nearby chart shows how unlikely that would be, and so how difficult it would be to recover. If sellers don’t take control Sunday night, then I would expect a flat to higher open that eventually retests Friday’s pre-open high.[/pay]

[pay]Pattern notes.
Optimism ahead of weighty news leaves less potential profit on the table for good news to provide. It also makes it more difficult for good news to be perceived that way. And the market is that much more of a sitting duck for bad news. This morning’s Employment Situation report is being preceded by yesterday’s rally, and by further gains overnight. So the news has its work cut out.

Friday’s opening setup.
S&Ps have already traded higher overnight. Price emerged from a consolidation pattern, so its gain represents a “new Globex trend extreme” that requires being retested during regular trading hours. The requirement would aid the recovery from a negative reaction to this morning’s Employment report. A favorable reaction would only raise that bar. The retest wouldn’t be required today, but I will be looking for a long-entry parameter so long as the open doesn’t gap down under yesterday afternoon’s ESm 1403’00-1404’00 lows. A higher open might still turn into the false breakout scenario.[/pay]

[pay]The pullback’s ESm 1392’25 target was met, and then exceeded, filling the gap back to yesterday’s close. That was on the way to probing yesterday’s low, which is now trying to hold as support, while yesterday’s close is trying to hold as resistance. That might not be enough for buyers to retake control. Instead there is potential for a substantial trend reversal to be underway shortly.

Today’s new high originated from under the two prior high closes, which the session is on-track to close under. That’s the behavior of impatient buyers who are incapable of sustaining a trend. A close under 1388’00 would be optimal, but just closing under 1395’00 would suffice. The setup has a big caveat. When it fails, it fails quickly, and fails big. So a close back above the two prior highs close (around 1399’00) would signal sellers buyers remained in control and ready to buy aggressively.

MACD & RSI were generally extended and oversold at Wednesday’s last low, making its retest likely. The timing isn’t specific, as the setup is similar to Wednesday’s pre-open low that also required a retest but had to wait for an interim 21-point bounce. Thursday’s econ reports aren’t very influential, but Friday’s Employment Situation report is. That tends to paralyze the market from trending attempts, so a bounce back to the 1396’00 area wouldn’t be surprising.

Addendum: The low was retested at the session’s last-minute, and it was accompanied by MACD & RSI diverging positively on the 3-minute chart. This offers the potential for a bounce, probably within the guidelines described above. A gap under 1381’00 would instead target 1368’00 but still be subject to the pre-Employment report paralysis.

(Did you get multiple copies of the last email? Sorry! I have no idea yet what happened, but it’s being looked into.)[/pay]

[pay]Pattern notes.
Tuesday afternoon’s recovery back to Monday’s close didn’t have time to pause if it hoped to beat the session’s last timing window that was shutting at 3:20 ET. But each successive pullback limit was broken as the drop extended into a close back under the afternoon’s prior highs. This setup robbed buyers of their traction and classified the afternoon’s range as distributive. Wednesday’s open became vulnerable to a steep drop – albeit a relatively shallow one – a drop that could be avoided only by gapping up above Tuesday’s highs.

Citicorp announced a secondary after the close that forced the Globex open down 3 points (circled on the chart). This is a retest of the morning’s ESm 1389’00 bias-down target that had held session lows. Could this serve as the consequence for buyers losing traction? Possibly, but there is room back up to 1394’00-1394’50 before making that call. Meanwhile there is room down to 1383’25-1384’75 if 1388’00 doesn’t hold here as support. (The target area was originally mis-typed 10 points higher.)

Indicators and Internals.
Tuesday’s negative internal spreads were fairly balanced to each other, so Wednesday’s session isn’t obligated to reward either side. Tuesday’s session never rewarded Monday’s buyers for their positive divergence, which might have aided Tuesday’s recovery. MACD & RSI weren’t particularly helpful at the afternoon high, which may have aided the afternoon drop.

Wednesday’s opening setup.
Despite the post-close drop in reaction to Citi’s news, a runaway decline isn’t yet indicated. First impressions are sometimes correct, and it’s interesting that S&Ps only dropped a little. Does that confirm this pullback has been a defensive move to help absorb Wednesday’s FOMC news? Did the Citi news send that best-laid plan awry? Overnight price action should make that clear either way. The morning’s pre-open econ reports should spark volatility, and another report due 15 minutes after the open will try to keep things alive. But volatility should recede by late-morning ahead of the 2:15 FOMC interest rate decision.[/pay]

[pay]Pattern notes.
Monday afternoon’s highs twice touched ESm 1404’00 without breaking higher. Despite overnight highs less than 1 point higher, a last half-hour dive to 1395’25 attacked session lows. The drop’s timing was inappropriate for new trending so it is less likely to extend down. Its origin was also “ineffectual pessimism” that couldn’t bear to test the overnight high. By closing back above ESm 1397’25 sellers started losing traction, and back above 1400’00 overnight would start to signal that buyers were gaining traction.

At the risk of sounding like a broken record, the paralysis was too much too early for pre-FOMC news, even for a decision as controversial as this week’s. This market is nervous. Or, at least, it wants to be nervous. So knee-jerk buying in reaction to Tuesday’s econ reports might quickly settle back into the range. That doesn’t make rallies impossible – they might even be more likely than a substantial or sustained drop. But knee-jerk selling might offer a more compelling long-entry opportunity.

Tuesday’s opening setup.
Two retail sales reports are due before Tuesday’s open. Consumer Confidence is due 30 minutes after the open, timing that tends to accelerate or reverse any initial trending. The reaction to each report could be exacerbated as participants interpret data to predict Wednesday FOMC interest rate decision – just imagine if the data contained a surprise. (The same will be equally true for Wednesday’s reports.)[/pay]