Saturday Review’s recording and transcript (for 10/18/2014)

The transcript just arrived this morning, so I haven”t yet been able to proof it. Click here for the recording…

Good morning, and welcome. It is Saturday. It is time for the Saturday review. Thanks for being here. It is gorgeous, gorgeous weather, as far as I can see, across the country, pretty much. I know this is a great sacrifice. Let”s see if we can get some value out of it. So, let”s look at the market.

Let”s start with the market on Friday and work our way backwards and just point out the context. Fridays are interesting animals, and if they aren”t interesting animals, or if they”re interesting animals, it”s because they can be so uninteresting. This Friday was pretty volatile, and thanks to there being such a wide range in the market recently, even a boring Friday session had plenty of room to move. What I mean by boring is, let”s ignore the values of price and just look at price action. Versus the opening print, 1878, to the close, and that”s not even the close that you”re looking at, 1880. The actual cash session equivalent close is 7950. There is no movement between open and close. That”s not atypical for a Friday, and more so for expiration.

There”s one thing that was unusual about it, and we”ll talk about that in a moment, that also creates a context for absorbing the greater view. Just to refer back to the top for Friday. Friday can be very uninteresting, and thanks to there being such a huge range in the market recently, there was plenty of room even for the briefest of moves. This was a move from 75 targeting at least 70, not that anybody could get that even with a limit, but that”s a pretty big move for a few minutes that is predictable. If I saw that pattern on a typical Friday, even though it would say we”re going down next, and that”s the minimum objective, and that percentage of a move versus the distribution that caused it. I wouldn”t even bother mentioning it. I would just monitor it for being done or not because that would confirm the greater pattern, but I wouldn”t bother mentioning it because normally that would amount to maybe 76 or 86 through the open.

We”re getting such huge moves here that I am able to identify a lot of different entries, and they are tremendously profitable. Either they”re tremendously profitable quickly, other than profitable quickly, and then tremendously profitable eventually, or they are quickly invalidated. This wasn”t even a buy signal. In fact, I had a couple of these. Right here didn”t have that action bull.

I just wanted to point out there was nothing accumulative about it, about the pattern longer term. There was no unfinished above, and there was a bearish WedEX indicator telling us that we”re heading down. That was resistance that could have been exploited for a retest of the high, and I had one here as well at the time. I didn”t want to take it. I pointed out that I wouldn”t take it, but that was resistance. When I say resistance, I”m saying these are make or break points for the market. These are very critical points where the pattern that I”m tracking, the pattern that”s being confirmed by little moves or by bigger moves playing out, the pattern that I”m tracking could be disrupted. It could be invalidated or it could be overtaken by another pattern in the reverse direction here or here, and the market doesn”t allow that, or the bearish Wednesday expiration indicator that controls Friday afternoon and Monday morning will allow it. In either case, it”s not allowed.

Sellers remain in control. So, we”re getting these huge moves, that”s point number 1. We”re getting big influences. The Wednesday expiration indicator triggered bearish, and it”s hard not to had the market extended down. Here”s Wednesday. It gapped down, remained under prior lows. The prior two sessions were trended down. There are other bells and whistles that might have invalidated that or came close to invalidating it, but didn”t. That”s a bearish, actively bearish at that, Wednesday expiration indicator, which doesn”t have any say on Thursday. It doesn”t have any say on Friday morning. It”s linked directly to Friday afternoon and Monday morning. Friday is expiration, right? Friday morning is opening rotation for expiration, but nonetheless, the Wednesday expiration indicator”s influence is from these two days. Had Thursday extended down further Thursday and Friday morning, then that would have had potential to invert the Wednesday expiration indicator. The bearishness that it picked up on bigger money, positioning, or posturing, or repositioning, reposturing ahead of expiration, repositioning or reposturing bearishly, might have picked up on cases of suddenly being impacted by something influential that wasn”t necessarily on the radar too recently, may continue reposturing and repositioning. It may not have completed that repositioning on Wednesday, and that may continue playing out Thursday and Friday morning. That means that the bearish Wednesday expiration indicator was only fulfilled so that Friday afternoon comes, and it”s overdone, and it inverts. It didn”t happen this week, this cycle. Thursday, if anything, ranged sideways led to higher biased upward, absorbing dips. Friday morning didn”t happen, gaped up, extended higher. All of that buying pressure. That”s tremendous buying pressure expended momentum, but for the bearish Wednesday expiration indicator to just step in front of and basically retrace. Not reverse, not yet, but that”s all that the bearish Wednesday expiration indicator has to do, is absorb bounces to qualify, and to stop rallies dead in their tracks. It did.

Then one more measurement here. This bounce was retraced considerably. It held at 61.8% retracement, 61.8% retest. That”s why there was potential to rally here. That would have invalidated the Wednesday expiration indicator, which was confirmed by closing back under the 38.2% retracement of this down leg. So, if the Wednesday expiration indicator worked, and this is what”s important to note for Monday. If the Wednesday expiration indicator is in play on Friday afternoon, then it is in play on Monday morning. Expiration lasts into Monday morning. It”s not the expiration itself. It”s the fallout from the expiration, reaction to the expiration. There”s still reposturing because you don”t know until expiration where you settle, so there”s still influences. It”s nothing to do with the contractual option expiration, the handbook that the CBOE hands out. It has to do with the decisions that are made, the influence that expiration had.

Here”s the interesting thing from Monday morning. If the expiration indicator worked or was influential to Friday afternoon, then it will be influential. That”s the rule. It will influence Monday morning as well, and if it was a bearish influence, it will be a bearish influence as well. If it was passively influential, or not necessarily passively, if it just was not a very substantial influence that is not aggressive, then it will be aggressive on Monday morning. It”s not either or. This one is aggressive, the other one isn”t, or this one isn”t aggressive, the other one is. If Friday afternoon”s influence were aggressive, Monday morning”s would be aggressive. If Friday afternoon”s is not aggressive, Monday morning”s will be aggressive or vulnerable to it. So, probably one is going to be aggressive, if not both. One being one of those periods, Friday afternoon and/or Monday morning, and that”s where I am right now. I”m trying to determine whether or not this was aggressive. This was a pretty substantial down move in absolute terms. When afternoon started, we were 1888 and got down to 70, an 18-point move. That”s huge. There used to be weeks that went by without a singular trend of that size. This happened within the space of a couple of hours. That”s tremendous. It was also retraced by 61.8%. Let”s start talking percentages because that”s just a retracement of the morning”s rally, all noise. By my definition, that”s noise. A trend that reverses back to the origin of the previous trend is noise. So, that 18 points is irrelevant when it was 18 points up and even more so from morning low to morning high. That 18 points up, compared to the moves that we”ve been seeing intraday, that”s even more so. That was the prior afternoon. If there”s any window in here, I can see, pretty much, that move or greater. So, it”s not even a big move, percentagewise. So, I”m having trouble calling this aggressive. I”m having trouble confirming that Friday afternoon was an aggressive move. It was retraced 61.8%. It didn”t trend all the way throughout the afternoon. It corrected. The correction didn”t gain traction, so we consider the bounce to have been absorbed. So, we consider the Wednesday expiration indicator to have had a bearish influence. So, if Friday was not the aggressive day, then Monday should be aggressively bearish from the opening print. Is everybody with me on that? Let me know if there”s any questions or if it”s possible that this is so clear to me or so usual to me that I”m leaving out something in the description. So, let me know if there”s any confusion or question or anything that needs to be elaborated on or repeated. So, that”s where we are right now. If Friday afternoon wasn”t aggressive, I”m expecting aggressively down Monday morning. Even if Friday afternoon was aggressive, it”s possible to still be aggressive Monday morning. At least one of those periods should be aggressive, and it”s possible for both. So, even then it”s possible, but it”s almost required if these is not the aggressive day.

Why not be short then? Why not be terribly short into Friday”s close? Because there”s one thing that the Wednesday expiration indicator doesn”t require, and that is the overnight, the difference between Friday”s close and Monday”s open. The difference between Friday”s close and Monday”s open could be zero, open flat, and then a plunge if it”s a plunge. The difference between Friday”s close and Monday”s open could, in fact, gap down already. It could also gap up, and it could gap up considerably. I”m not saying we”re leaving the door open to that, because who knows? The Wednesday expiration indicator”s bearish application to Monday morning versus Friday afternoon has had instances of nevertheless gapping up. It”s what happens after the gap up. So, just to put this into perspective, let”s say we”re in recovery mode. Monday”s open could gap up to 1918, higher prior lows of 1918, and the balance of the morning trends back down to these lower prior highs. That”s a pretty substantial down leg. 1918 to 1891 or 1892, 26 or 27 points. That”s a big morning. Bigger than Friday afternoon. It would have to be, to be more aggressive, but it wouldn”t preclude gapping up, and it would never get profitable. Actually this would be the target area, lower prior highs to the gap. So, we know one thing about the post open action Monday morning. Very likely, wherever the open is, gapping up, gapping down under these lower prior highs, which would have substantially more downside risk, or just opening flat and trending down to these lower prior highs or to the gap back to Thursday”s close. In any case, if we get through the opening 15 minutes of volatility, and the post open action isn”t trending down, then we”re going to have a big question mark, if not an “X,” over Wednesday”s expirations bearish indicator. If the opening 15 minutes of volatility, from whatever open print, hasn”t trended down, then we”ll want to see what the influence is because it”s pretty powerful. It”s overcoming the Wednesday expiration indicator.

If it gaps up on Monday, I would be short immediately. I would be short immediately, if not into the pre-open, really, but with a stop, yeah. That would be the strategy. I”m going to be looking for something. Now, the opening 15 minutes might be something like this, gap up, range a little higher, and then at 9:45, be lower. So, there is a strategy, a low maintenance strategy, but I don”t know how big of an interim swing there is. Then, if that big interim swing doesn”t reverse down, and it turns out the Wednesday expiration indicator isn”t valid. So, the premise, not necessarily the execution, but the premise is coming out of the opening 15 minutes of volatility, the market should be behaving bearishly, and that should be our confirmation that will continue behaving bearishly. The actual execution should be within that list.

Alright. The bigger picture, real quickly, is the end of the week. You know, we talk about trend changes. Here is a trend change signal, a high, a higher high, and interim low broken through a close. That”s on a daily, and those can add up. Now on a weekly, separating major trend moves, we”ve actually confirmed trend change. It”s really tough to be bullish, in that scenario. In other words, it”s very similar to the break under that interim low, fought off once, basically qualified, and then, borderline, was invalidated, which only slowed the reversal down. It didn”t prevent it. Similarly, low close, which I have the trend here, bought off initially, extended down anyway. That”s a pretty big level. We start recovering that prior low. It”s not just significant for it being a prior low that we closed under and recovered, but it”s a prior low that”s had two consecutive lower closes under it and a third lower close to confirm the confirmation. That”s not necessarily bearish. In other words, a breakout confirmed by a second consecutive lower close is due the reward of some future lower close below them. Not necessarily consecutively at that point, and not necessarily limited to one lower close. It could be 100 lower closes, but once there”s at least one, that confirmed breakout is fulfilled, or the minimum requirement is fulfilled. So, to recover after the minimum requirement has been fulfilled, to recover back above that trend reversal, the trend reversal level – I called it a breakout, I should have said trend reversal level – That right there is the minimum that is needed. It could be invalidated the next day, but that”s the signal that this decline is down leg, in its entirety, has ended. Momentum need not reverse up immediately. We could then take advantage of that and consolidate, accumulate back and fill and then watch a rally leg, or it could zoom higher to aggressively be maintained too optimistically. That optimism would be sorely missed just when it”s needed most, but it could trend higher anyway.

So, bigger picture, that”s the bullish resolution. How does that fit, for instance, with gapping on Monday and the bearish Wednesday expiration indicator comes into play? Look at all the selling pressure that would be gotten out of the way. So, gapping up, even if it”s immediately rejected as the bearish Wednesday expiration indicator would suggest, could lead to a very bullish resolution. Meanwhile, There”s this small problem of nothing hinting that that”s going to happen otherwise. That kind of gap up has to happen despite momentum. That kind of reversal has to be a gap up because the pattern”s momentum suggests otherwise. When buyers don”t gain traction for their efforts, and there is an effort, the only way to extend that effort that didn”t gain traction is through the attraction of new sponsorship. That new sponsorship makes itself known not by taking the baton from a standing still position, but actually gapping up.

So, in the bigger picture, this is the daily. This is the S&P 500 cash. So, about a 6-point premium now to futures, just to put this in perspective. These are the prior highs being tested right now as support, trying to recover them so far unsuccessfully, lower prior highs. These are basically from April, this Spring. The prior lows to that range, there are actually pivotal lows in here that have been probed, prior low in that range. It”s not a trend pivotal lows, so it doesn”t have the same requirement to go on and test that actual low, but it”s still a reference point. That”s the support. It”s a pretty thick support range, but the lower prior high, what was the high or a high of the range, not necessarily the actual high, but a pivotal high – were those entirely covered? They were not, so we can”t say that momentum has reversed up. We can”t say that the selling has been absorbed, so meanwhile we”ve got these prior lows. Prior lows are never durable support. When they”re retested, they”re broken. They may influence immediate reaction, but they”re eventually broken in search of a better bottom, even in the strongest of up trends. We have one actual low that optimism avoided touching all together. Here”s a lower prior high that could come into play. When you get through there, we really don”t have a lot of support. This is nominal. You really don”t have a lot of support down there. A lot of this can be retraced if we”re not in cover.