10:45 am EDT:  The probe up to test the GS earnings report pre-market high of 904.00 filed early and now the ES is looking to test at least the 890.75 to 893.25 support area.  Given the action so far, the crucial area for the longs is the lowest 50% retracement off lows of 884.75 up to the day-session-only daily pivot of 888.25.  This would, however be 15-20 points off the overnight high and longs won’t want to have to defend a move that low, especially with markets expecting a range day now.  Below 884.75 and we become much more bearish and the prospects of a paint the tape close diminish.

The ideal situation for the longs is to defend 890.75 to 893.75 and then resume the up move.

The Precise Take – Goldman leading the bull charge

Yesterday, financials lead the markets higher with the ES accepting value at progressively higher levels, reaching the 897.75 minor point of control into the close.  Though we did not think the ES would be able to clear 893.25, which did put up the slimmest of fights, the prospect of superb Goldman Sachs profits had bulls salivating.  As we write, GS has released its Q2 09 report and has allowed the ES to clear more overhead supply up to 904.00.

Today, the Federal Reserve Bank of New York (FRNY) will be conducting permanent open market operations (POMO), where by it purchases from large banks on average $8 B in Treasuries and the banks in turn lever this amount by 100-800 times and flood the markets with cash.  Since these operations began on March 25, 2009, most POMO days see significant gains into the close, especially in the final hour of trade, then retreat the next day.  (Thanks to Thanassis Stathopoulos and Billy O’Nair for this discovery.)  What is important, however, is that overhead supply is cleared.  We expect no different today since the paint-the-tape trend has been accelerating since May, and also note that Thursday is a POMO day with JP Morgan reporting in the morning as well.

Accordingly, we expect the ES to attempt to test and/or accept value either today (or if it cannot today then Thursday) at the 913.00 highest value area point of control (and major trendline resistance), with a possible spike above to the 922.25 area (just above the highest 61.8% retracement from contract highs and a minor point of control) to force more short covering.  Because of the after POMO day effect, tomorrow should be a down day and we do expect a return to test the 865 area into next week after options expiration this Friday.  A move on volume above 922.25 invalidates this scenario and probably signals a H&S failure with at least a retest of highs in the 950 area.

As we write, Retail Sales and PPI are sending the ES down a bit.  Early, longs want to see 892.25 hold to be able to continue their gains.  Below that, the daily pivot area of 886.25 to 888.25 will offer support and, below that, we become…

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