Market Wrap

[pay]Pattern notes.
Friday’s pattern stuck to its script. Overly-optimistic buyers reacted to the Employment Situation report as expected, and pushed S&Ps up to new highs before the open to form a new Globex trend extreme. Also in-line with expectations was the gain’s rejection back down into negative territory. And the script was completed when sellers failed to gain traction and S&Ps recovered to session highs. Two items weren’t defined going into the session, and the weren’t very well-defined coming out of it: whether the pre-open high would be retested, and whether the close would confirm or invalidate Tuesday’s breakout.

The pre-open high was a knee-jerk reaction the Employment report, a spike up to ESm 1388’00. At least, that’s where the mini contract printed. But that an over-reaction to the large S&P contract which reached only 1385’00. Regardless, S&Ps fell to 1364’25 before attempting to retest pre-open highs, and the recovery reached only 1383’00. This did happen to be the high that printed prior to the Employment report. My rules might allow this to serve by proxy as a retest for the pre-open high, if S&Ps had then closed the session back in negative territory.

This couldn’t have been muddier, since S&P futures did close negative but the underlying cash index did not. Not clearly triggering a setup means the opposite is likely true, that the pre-open high must still be retested during regular trading hours. Closing back under the week’s prior highs would have invalidated Tuesday’s breakout, but the unfinished business at higher levels doesn’t yet allow that to be declared definitively. So another rally attempt is likely, regardless of whether its gain is maintained.

Indicators and internals.
Although NYSE up and down volume were essentially even with each other, the session produced 25% more advancing issues than decliners. That tends to obligate Monday’s session to reward Friday’s buyers for their relative productivity. This might be mitigated somewhat by the day’s relatively low volume, and it would not be required at all if Monday’s open gaps down under Friday’s lows in the ESm 1365’00 area. MACD & RSI diverged positively at the end of Friday afternoon’s pullback, but only on a 1-minute chart, so this buy signal can’t be relied upon to persist through the weekend.

Monday’s opening setup.
No econ reports are due Monday morning. But the quarterly onslaught of earnings reports are fast-approaching. Tuesday promises to be doubly interesting with both a post-open report and then FOMC minutes in the afternoon. So any trending attempted either way Monday find it difficult generating sponsorship to extend very far considering the sizeable unknowns lurking just around the corner. So long as the open doesn’t indicate a gap down, at least one Friday’s reaction highs is likely to be retested.[/pay]

[pay]Pattern notes.
Tuesday’s rally was either the beginning of a new upleg, or else a retest of last week’s highs. Since Tuesday’s close was the first new relative high close in a week, a second consecutive higher close Wednesday would have confirmed Tuesday’s breakout. Wednesday’s close didn’t satisfy this parameter. That doesn’t mean the alternate scenario is in-play.

Wednesday’s opening setup.
Thursday’s pre-open Jobless Claims econ report is capable of influencing price action. The 10:00am ISM Survey is lower profile, but its timing of 30 minutes after the open can accelerate or reverse any initial trending underway. Trending might be difficult to find after that. Volatility tends to become paralyzed prior to such a weighty announcement as Friday morning’s Employment reports. So while a higher open might be a negative for reasons described earlier, it might be difficult to attract sponsorship capable of extending higher. A lower open would be credible for extending down, but I’ll want to see a strong open for signs of topping.[/pay]

[pay]Pattern notes.
Monday afternoon’s price action took full advantage of room for a pullback down to ESm 1321’00 – even retesting it twice while MACD & RSI improved each time. That eventually produced a bounce up to 1326’00 and then another up to 1329’00. S&Ps dipped into the cash session close at 1324’00, and then afterwards back to 1320’00. The cash session usually prevails in contradicting closes, so I expect Tuesday’s open to gap back up. And not just back to the cash session close, but higher in order to balance out the extra – perhaps even above Monday’s 1330’50 high.

Tuesday’s opening setup.
The cash session usually prevails in contradicting closes, so Tuesday’s open is likely to gap back up. And not just back to the cash session close, but higher in order to balance out the extra – perhaps even above Monday’s 1330’50 high. This wasn’t signaled at Monday’s close, but it does lend credibility to an overnight rally’s ability to extend higher. Sellers will need to produce a gap under the 1316’00area to compensate for holding two tests of 1321’00 Monday, which would have triggered a new downleg.

[pay]Pattern notes.
Friday’s pattern was similar to Thursday in one very important way: the relentless push to lower lows, despite the open having gapped up. Generally the market abhors repetition. A “third strike” rule would be more poetic than accurate, and another gap up that resolves in lower lows would actually be more bullish. If two failed gaps up can’t produce a gap down, then a lower low intraday wouldn’t easily gain traction, and would more likely be only a formality to forming a low.

So, let’s informally call this the “third at-bat had better knock it out of the park” rule. By that standard, two lower lows followed by a drop to lower lows only to recover would be bullish. And instantly recovering Friday’s last-hour drop would be a pretty good swing at the first pitch – still, it would need to remain airborne for awhile so almost any pullback could stop short of reversing momentum back down.

Indicators and internals.
One motivation behind recent gaps up is that internal spreads were creating the obligation to reward the prior sessions’ buyers for their relative productivity. That hasn’t changed, since Friday’s 2:1 spread between declining issues and advancers was produced by a 3:1 spread between NYSE down and up volume. As usual, the obligation can be rendered moot by a gap down under the prior session’s low. MACD & RSI were mixed at Friday’s low so there is no clear signal that a retest is required.

Monday’s opening setup.
Under the first two patterns described above, the next lower low would target ESm 1311’00. There is potential that Friday’s 1313’75 low fulfilled a slightly higher target, but that’s not likely; Friday’s post-close bounce peaked 1 tick under the 1319’50 level where closing any higher would have signaled momentum reversing up. The third scenario would be triggered by maintaining an immediate recovery above 1321’75. But the decline otherwise remains intact.

Monday’s econ report isn’t very high-profile, except that its timing 15 minutes after the cash session open does have potential to accelerate or reverse any trending already underway. The quarter’s last trading day might be influenced by portfolio managers’ window dressing, but not with any predictability (i.e. timing and direction).[/pay]

[pay]Pattern notes.
A funny thing happened on the way to oblivion. Thursday’s late drop under ESm 1338’00 fell to new session lows, closing at least under 1332’50 to signal a new downleg underway. Then around 1327’50, MACD & RSI diverged positively on a probe of lower lows. That was quickly rejected, and then technicals diverged positively again on another brief lower low. It was too late in the day for my rules to allow a buy signal, so I could only warn that the setup would have been a screaming buy had it appeared at any other time of the day. S&Ps did firm after the cash session close, and extended up to 1338’00 by midnight.

Friday’s opening setup.
The negative divergence at midnight has room down to ESm 1335’25 before threatening to let sellers gain traction for a reversal, which would be signaled no higher than 1334’25. Otherwise, a short and shallow retracement is next targeting 1340’25, and opening at either 1336’50 or 1340’00 would be enough to reject Thursday’s late downleg. I would find any early strength encouraging. If the overnight rally is instead retraced, then encouragement will turn to disappointment. At this stage of the pattern, each is equally capable of triggering a steep move in either direction with the weekend’s illiquidity just hours away.[/pay]