The 3 Yr Note Auction at 1:00 pm did not go as well as had hoped and, as warned, has given support to equities on a simultaneous retest of yesterday’s 882.00 low in the ES (low of today is 882.25).  The medium term oversold signal on the small and mid cap ratios from this morning’s report are still valid as IWM and MDY outperform the S&P 500 and they continue to turn up, though the equal:cap weighted ratio has turned down slightly, indicating larger caps are struggling to find a leader.  Should the ES trade below 880.00 on volume, we will consider the medium term bullish signal to have failed and will not look for much of a bounce into Thursday. 

As the ES never broke through the early range topping at the daily gap of 896.00, we have been short term bearish, but are willing to take long shots from 884.50 or even on a slight break of 882.00, but will stand aside below 880.00.  Aggressive shorts can enter at 887.00, but we would hold out for 889.75 to 892.00.  Above that and we will wait to see if the ES can yet clear the 896.00 critical level for the longs.

The Precise Take – Longs retain key support and break marginally higher overnight

Per our update yesterday, we finally got an uphook in the oscillator of the three of the ratios we watch (see page 2), which is moderately bullish for at least a few days.  We don’t expect a return to highs, but this could be an opportunity to add to shorts.  Longs pushed into the countertrend short of 896.25 into the close and overnight took the ES slightly above key resistance at 897.75.  Both sides will battle it out early (perhaps prior to open) in the area defined by the overnight low of 889.50 through the daily pivot at 891.50 up to the daily gap at 896.00.  Above, there is Fib confluence at 901.00 (also with daily R1) and several Fib levels from 905.00 to 906.75 (with daily R2).  If longs can break through there, there is a decent chance of a retest of the highest value area (shaded blue below) centered around the 913.00 point of control.  As 917.50 forms the upper bound of this value area and is the last 50% retracement from contract highs, we entertain the possibility of a move as high as there into Thursday, over which time we will see a number of big Treasury auctions.  Any notable weakness could be an inflationary boon for equities.

First thing’s first, though.  For those followers of Tony Crabel patterns, yesterday was a bear hook in the day-session-only of the ES, with a narrow range, open below the close of the prior day and close above the close of the prior day.  If longs cannot break the overnight high of 898.25 and through trendline resistance below, we will…

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