10:20 am EDT:  The ES tested supply in our bullish area just above yesterday’s settlement of 853.50 and now needs to get above this area to test contract highs at 957.50.  Otherwise, we will probably test overnight and day session lows in the 942.75 to 944.75 area, which we would fade long with a tight stop, but not hang around long below.  Fading short above the current day high of 954.50 is very risky.  Then again, so is a long between 853.50 and 857.50.  The shorts need the high to be in and the longs have the advantage of being able to test lows and rally again in the afternoon.  Only below 940.75 does it look like the high is in for the day.

10:30 am is the petrol report with crude so far backing off its high of yesterday.  Higher crude = improving industrial capacity utilization = higher equity prices.  The inverse is true as well.

For Post POMO day profile followers, the down correction came a bit early pre-market, so we’re not as encouraged for the typical pattern to hold and would not hang around with shorts should we see new highs.

The Precise Take – Continued gains, but hanging at resistance

Yesterday’s 16.75 point intraday correction in the ES was the largest since July 8’s 18.25 point correction, which set the interim low of 865.25 that was tested three days later and began the latest up swing.  Though the rally from the early afternoon into the close yesterday was impressive, it was entirely consistent with the profile of one of the days in which the Federal Reserve Bank of New York conducts permanent open market operations (POMO), flooding large banks with cash, which can be leveraged, and is highly correlated to a very strong end-of-day close*.  The profile for Post POMO days (today) typically sees a strong decline in the first hour of trading (already begun today premarket), a brief afternoon reprieve into the 1:30 pm closing hour and continued marginal declines into the close.

Additionally, yesterday’s day-session-only generated a hanging man candlestick pattern with a small body on top with a long shadow beneath it, which we have not seen in some time.  Placing the additional condition of having the open or close of the hanging man be greater than the greater of the open or close of the previous bar, we have only seen this pattern a few times in the last few years.  The last such one was on July 18 08, which was after a prolonged down move and did see higher prices in the subsequent months.  Prior to that, however, there was one on May 16 08, which saw a spike high above the 200 day MA the following day, only to be hammered lower over the next two months.  Before that, another on Dec 26 07 was the high for the next month and also coincided with a peek above the 200 day MA.  Prior to that, there were two close together, one on Mar 26 07 that saw a 5 day decline, and another on April 4 07 that saw a precipitous two month rally.  Accordingly, if the ES cannot close materially higher today (or tomorrow at the latest), this is a very bearish pattern short and medium term.

Bernanke speaks again at 10:00 am; however, we think his points were made yesterday where he talked bonds up and yields down to save a retest of recent extremes.  As we wrote in an intraday update yesterday, he does appear more concerned with keeping down long term yields than propping up the stock market.  With oil on the rise again, eyes will also be on the 10:30 am petroleum status report.

As we write, the ES has entered our bearish zone and already broken down to the daily S1’s, where it has found temporary support.  We are bearish again from…

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