Market Wrap

[pay]Pattern notes.
Monday’s last-minute dive ended the day ranging narrowly around last Monday’s close. A definitive recovery would have completed the “Gotcha!” setup that requires a gap up the following day. Illustrating this, a 10-point bounce was retraced entirely to back under ESm 1280’00 where Monday’s session closed. Now Monday’s high is being probed by 3 points up to 1292’50, threatening to fulfill the Gotcha’s gap up at Tuesday’s open.

I’m not going to try shorting new relative highs before something indicates their failure. But it is difficult to buy hand-over-fist when the market itself is fighting the setup. If the premise of a Gotcha setup is correct, then the immediate reaction should be up regardless of the eventual reaction. So I’m not going to doubt that stage so long as S&Ps remain above last Monday’s ~ESm 1278’00 close. Eventual reactions to Gotcha setups can extend for 2-3 days, but the hesitation here isn’t tracking the classic Gotcha template.

Indicators and internals.
NYSE down volume measured 4 times up volume, but produced 4-1/2 times more declining issues than advancers. Normally that would obligate the following session to reward sellers for their relative productivity. And normally that would also apply to an abnormal day like Monday. MACD & RSI meanwhile aren’t confirming the overnight probe above Monday’s highs, so some sort of pullback here is likely.

Tuesday’s opening setup.
The market’s hesitation at tracking the Gotcha template might prove to be constructive from a contrarian perspective. Two relatively high-profile econ reports are due pre-open (Housing starts, PPI), and the afternoon’s FOMC interest rate decision comes amid growing pressure for a 75-basis point cut. The Gotcha setup’s bullish resolution remains in-play until proven otherwise. But at this point I wouldn’t be surprised if it were proven otherwise. And at this point that would be proved by a pullback that didn’t hold ESm 1281’50.[/pay]

[pay]Pattern notes.
What a week it was. And what a week it will be. Bear Stearns might have avoided its untimely end, or at least delayed it for a more timely one. The event helped crystallize the impression that the risk hasn’t yet abated, knocking down prices back to levels that more appropriately discounted this perception. You won’t find it listed on any of this week’s meetings, conferences and announcements, but it might as well be the only thing. There’s also an FOMC meeting with interest rate announcement Tuesday afternoon.

Last week was also notable for having finally retested January’s low. Well, not finally. Friday’s low retested it. And January’s pre-open “Globex trend extreme” requires a cash session retest, too. Friday’s closing bounce avoided signaling whether to hold short over the weekend, almost a “never” for my rules, with this situation almost fulfilling the exception. A last-hour recovery is always suspicious, let alone a last-hour bounce that doesn’t recover anything substantial. A last-hour bounce on Fridays is less credible, still. Regardless of how this week starts, or how it ends, I don’t know how it avoids including new lows whether by detour or downleg.

Anyway, this week’s scheduled events alone offer plenty of catalysts for volatility. And more so than usual, with there being 20% less time to play out before the market closes for Good Friday. The compacted time frame often exaggerates volatility. The impending three-day weekend of illiquidity doesn’t help matters. Did I mention this week is option expiration? Quadruple-witch, no less. Don’t think just because everyone sees these on the calendar that the schedule change won’t wreak havoc on volatility.

Indicators and internals.
MACD & RSI were mixed to higher at Friday’s low, which the 25-point bounce from there has already satisfied by recovering one-third off the session’s low (two-thirds before softening into the close). Declining NYSE issues numbered 5-1/2 times advancers, on 11 times more down volume than up volume. The internal ratio of 2:1 can obligate the following session to reward buyers for their relative productivity. But the absolute spreads are too deep to avoid a retest.

Monday’s opening setup.
A break under Friday morning’s low in the ESm 1280’00 area isn’t difficult to imagine since the afternoon’s low was lower only 90 trading minutes earlier. But it is difficult to imagine a recovery if the break were maintained through the 10:15am ET window. Futures closed 3-1/2 points above the cash session, leaving a vacuum that will try to send price down to erase the premium. That often kick-starts more.

So bullish hopes appear more than ever to be pinned on whether buyers can be enticed and sellers can be inhibited early enough, by something external like a news item. As of Sunday afternoon the Wall Street Journal is reporting an impending deal between BSC and JPM, at much lower than Friday’s closing price for BSC. Recovering above ESm 1300’00 would be more bullish, at least for the near-term.

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[pay]Pattern notes.
A quadruple top developed off of ESm 1324’25 during the half-hour that began at 2:00pm yesterday. Negative divergences among MACD & RSI signaled a pullback targeting 1315’50-1317’25 that was triggered at 1321’50. A drop to the target area was resolved by retesting the quadruple top one hour later, forming a larger double top. Another negative divergence signaled a pullback that fell overnight to 1302’00, where yesterday’s pattern narrowly avoided signaling a bias-down.

ESm 1302’00 wasn’t low enough, and despite bouncing since then to 1314’50 (if not because of it) lower lows are likely. There is room down to 1308’00-1309’00 before signaling the move to new lows is underway, confirmed under 1306’00. Currently the signal is being attacked by a 5-point drop off the bounce’s high. If lower lows aren’t signaled before first recovering 1311’50, or if the signal fails by then recovering 1311’50, yesterday’s tops – quadruple, double and otherwise – would likely be retested and probably broken.

Indicators and internals.
50% more NYSE up volume than down volume Thursday produced only 40% more advancing issues than decliners. This obligates Friday’s session to reward Thursday’s sellers for their relative productivity, and that seems to be in process overnight. Just like MACD & RSI at Thursday’s highs had signaled a drop, a positive divergence at the overnight low signaled a bounce. That bounce has been productive, and the buy signal requires no further fulfillment.

Friday’s opening setup.
The pullback from ESm 1314’50 is probing the 1308’00-1309’00 sell signal, but MACD & RSI are already oversold, so it’s a little suspicious being triggered before price could consolidate a little, and the 1306’00 confirmation is only more important. But it’s still be credible if triggered so long as its 1311’50 isn’t triggered, which in turn would be credible for resuming the recovery. CPI due one hour before the open should try to shake things up a bit. Consumer Sentiment is due 30 minutes after the open, timing that tends either to accelerate or to reverse any initial trending underway. This being a Friday, the morning’s bias signal is likely to persist well into the afternoon.[/pay]

[pay][Abbreviated today due to time constraints…]
The entire afternoon was spent climbing back to pre-open highs so the retest’s magnetic attraction could be neutralized (along with the gap up to the cash session’s open). The reaction was equally likely to trade either higher, or lower. It didn’t really do either, ranging almost equally higher and lower around the ESh 1310’00 target.

MACD & RSI were mixed among various intervals, offering no clear signal for tomorrow’s open. The violent gap up above the past week’s orderly decline doesn’t qualify as a trend reversal, but there is nothing indicating that the reversal attempt won’t attempt to extend higher.

Econ reports are limited Wednesday (and plentiful on Thursday when the front-month rolls to Jun expiration). This week’s lows still require a retest and eventual break, which this detour has only interrupted and not changed.[/pay]

[pay]Pattern notes.
S&Ps had barely ticked under the cash session low to officially fulfill the “V” bottom’s required retest, then reversed up soon after the Globex open, eventually probing the ESh 1283’25 bias-up signal by 2 ticks. A dip just pierced the 1279’75 bias-down signal, and holding it as support would allow the 1288’50 bias-up target to come into play – where the decline would become likely to resume again. Even that strong of a gap up wouldn’t recover any significant resistance, or break the downtrend. Monday’s “V” bottom requires more retesting than the momentary piercing it got Monday, and the next lower targets are essentially 1266’00 and 1255’00.

Indicators and internals.
Monday’s internals certainly left a vacuum for buyers to fill. Nine times more NYSE down volume than up volume produced “only” five times more declining issues than advancers. The spread between issues is wide enough to demand an eventual retest of the low, if not a resumption of the decline. But the lopsided application of volume required Tuesday’s session to reward Monday’s buyers for their relative productivity, even if only momentarily.

Tuesday’s opening setup.
There is room back up to ESh 1281’50-1282’00 before buyers gain traction again. Overnight illiquidity hampers predictability, but the rally attempt is credible so long as 1277’75 holds as support. The caveat is that the overnight high – like Monday’s pre-open high – is not a “new Globex trend extreme” that would otherwise require retesting during regular trading hours. So failing to maintain this overnight rally could easily resume the decline and produce a gap down to new lows tomorrow.[/pay]