11:24 am EDT:  We incorrectly identified Wed and Thurs of this week as the two days on which the Federal Reserve Bank of NY would conduct permanent open market operations (POMO).  In fact, it is today (Tues) and tomorrow (Wed).  This increases the likelihood of a correction to be underway by tomorrow (Wed), instead of Thursday.  Regret the error.  Today’s POMO results were for a meager $2 B, so quantitative easing could conceivably continue beyond this week with smaller auction amounts.

After an initial failed test of the 8:30 am spike high to 1048.75, longs have supported the ES in the expected area of 1037.25 to 1039.50 per our morning report.  If the ES accepts value in the upper half of the combined session range (1043.50 and higher), there could be a successful afternoon push to new highs, as we have seen in previous days.  Otherwise, the conditions for this morning’s high being the September high are partially in place.  We would like to have seen a directional push down by now, but a close under 1030 still signifies the top is in for us.  For this reason, we will not be buyers on any further weakness (including test of 1038.25 low), and will instead begin intraday shorting on a break of 1037.00, should it occur.

The Precise Take – Strength in equities into three day critical news period

Leaders & Medium Term Analysis: The correlation divergences in our leaders has more or less disappeared, with equities and the EuroYen forex cross up yesterday, Treasuries and the US Dollar down, and gold treading water.  Over the next three day, a slew of major reports to be released pre-market, including PPI, Retail Sales, CPI, and Housing Starts, are likely to give equities pause, as they have done in months past.  Combined with the statistical likelihood of a material correction going into the third week of October as a result of record money supply contraction, we expect the monthly high to be posted on or before Thursday.  The first sign will be a more bearish than expected reaction to one of the major reports.  Ideally, there would be a new spike high on a bullish report and a reversal down in price into the open with a close below the 1030 to 1033 support area in the ES.  We have taken into consideration this week’s POMO schedule (to be conducted Wed and Thurs), which will likely burn the remaining unused portion of the quantitative easing’s $300 B mandate.  Thursday for sure needs to close below 1030 to validate this theory, otherwise the extension upwards in equities will likely continue.  Our upside price target range remains 1053.25 to 1066.00, which are major resistance areas on the daily continuous futures chart for the ES.  However, if we get the reversal criteria before the area is reached, we will not hold out for the extension.

Trading Today:  Longs should heavily defend today the 1037.25 to 1039.50 area, which includes the daily pivots and yesterday’s (and long term) market profile points of control.  We become intraday bearish below, watching price action around the 1029.75 to 1031.00 support area, where we may fade long.  Below, and we will not pick bottoms as the end of this rally could be in.  As we write, equities are heading higher off Retail Sales at 8:30 am and have entered our intraday bullish area (above 1045.25).  There are several potential reversal zones up to the 1057.75 area, so while we do not want to pick tops today (as we feel the eventual medium term reversal is likely to come tomorrow or Thursday), we will…

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