Still in the neutral zone, having found support at the neckline of 875.25 and not being able to punch through yesterday’s 883.50 during the day session (though overnight there was a spike high on the 8:30 am jobs report to 884.25.  It is now more important for the longs to hold support at 875.25.  Though the pivot, gap fill level and yesterday’s point of control at 871.25 could all provide support, time decay makes the case for the longs less likely as the day wears on. Per our morning report on Federal Reserve permanent open market  operations (POMO), there is usually a slight surge into 10:30 am (today negligible) with a decline into 1:30 pm and a rally into the close.

Putting it all together, ideally we see 875.25 hold into 1:30 pm and rally into the close, though we’ll accept 871.25 as support and remain slightly bullish.  Below that level and it becomes unlikely that we get a rally into the close that takes the ES above 883.50 and allows for further gains into tomorrow.

The Precise Take – 10 Yr Auction Resounding Success but H&S neckline decisively broken

The greatest Treasury auction of the year sent bonds vertical with steep drops in rates across the yield curve.  The short covering in long dated Treasuries has begun and mortgage rates look like they will again drop below 5%, so all is well in the land of Ben.  Except that equities had to fall on the sword, which was a direct cause of the sharp contraction in money supply.  Eventually, the FR printing presses will be kicked into high gear again and we expect that will support equities, but as we have warned before, this is a dangerous game for Bernanke to play and much to go wrong.  See page 2 for an important analysis of another game the Federal Reserve is playing through permanent open market operations and the trading implications for today and tomorrow.

Gold has broken key support on quelled inflation expectations and the US Dollar was marginally stronger yesterday (except against the Yen which saw a giant drop), though the Dollar has given back most of its gains overnight.

In the ES, the first downside target of 866.50 (long term Fibonacci confluence on the continuous futures chart) provided support to the tick, and after a second breakdown to 865.25 (trend channel support in the below chart), it was able to recover into the close.  We are bullish today, but will be more confident being so upon a break up through yesterday’s 883.50 high, which would also break very steep trendline resistance (also below).  Upon a break of a head and shoulders neckline, there is usually a retest of the neckline and often it is exceeded somewhat just to shake out the weak shorts.  Accordingly, we believe a reversal to the downside will either occur in the 888.00 to 893.50 area, or more likely, the 901.00 to 907.00 area.  If the ES cannot break 883.50 today, it is more likely that we will get new lows into early next week and get the retest of the neckline next Thursday.  In the unlikely event that 907.00 is exceeded, we expect…

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