12:16 pm EDT:  This probably will come as no surprise, with equities retracing nearly all of yesterday’s gains, but some of the leaders’ action is truly astonishing.  Namely, in the EuroYen, which has now traced out three days of serial reversals, each of which has been at least 2.7 big points.  30 Year T-Bond futures have nearly broken out of the downward channel decisively and the 10 Year has made new highs for the week.  This pretty much negates the bull’s Hail Mary to new highs we wrote as a possibility in the morning report.  It probably does not help that the NYSE has had quote dissemination problems all morning.

10:08 am EDT:  Some volatile price action on the Chicago PMI upside surprise, as the ES rallied off the combined session daily pivot, then sold off at yesterday’s settlement in confluence with one of yesterday’s points of control.  Consumer Sentiment came in as expected. 

Critical resistance is now 1061.50 to 1063.00 and shorts will defend it aggressively as the ES approaches it again, as we write.  If the ES can break above, then one of the daily R1’s, 1071.25 or 1068.75 will likely be the high, but an end of month directional move is always possible to take it beyond.  If the ES makes new lows, we will not fade long.  Until then, we continue to look for longs.  No bottom or top picking today.

With the Fed’s $300 billion gift card to PD’s Treasure Island maxed out, one wonders who will support the vendors chomping at the bit to offload Uncle Timmy’s 3 to 7 year wares (much less the 30 year, being so two-thousand-and-late).  But with the sun setting, the Japanese tourists trickling out, and the kids tired from a hard day of play on the S&P 500 Coaster and the SPY IOI Whack-a-Mole, it would be easy to settle into a semi-euphoric complacency, thinking ahead to a frolic-filled night on Pleasure Island. 

This is the season when retailers typically look ahead with glee and patriotic investors hit the buy button on their stock accounts, not to return to their screens until January.  With equities awash in the greatest liquidity bath since Emperor Claudius built up Aquae Sulis from a Celtic mud pit, one hopes the proverbial plug has not been pulled here because, without the foundation of a stable and growing money supply, equities need the spigots set to max.

True, we still have QE in the form of Agency and Agency MBS, the latter of which could be considered a $1.25 trillion fire hose astride the puny Treasury QE faucet.  Then, there’s always the odd SFP wind-down.  But the sun rises and falls with the 2s10s and, should they get out of hand, already-difficult-to-secure business funding costs will rise along with mortgage rates.  This, ahead of record CRE resets, cannot be had.  Worry, not–Uncle Ben has a plan (aside from backstopping E-Trade in exchange for removing the sell button from their platforms), and all will be revealed soon.  Not at the next FOMC meeting, mind you, but surreptitiously, through the back channels of the Fed’s PR page. 

Will it be QE 2.0, usurpation of the money markets, or will the lamb of choice be the Primary Dealer Credit Facility?  We’re on pins and needles here, so please don’t disappoint us. 

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Update:  Ironically, a crashing stock market relieves the yield bloat.  Perhaps the Fed is content to watch the carnage for a while.

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The Precise Take – Equities attempt to hold on to gains on the close of the month

Leaders Analysis:  Big reversals yesterday in just about everything and overnight, mostly consolidation.  30 Year T-Bonds look poised for another test of the upward boundary of the downward trend channel, so we will watch them closely today to see if they can break out (equities bearish) or reverse down (equities bullish).

Medium Term Analysis:  We wrote toward the close yesterday that it would take a near perfect storm for bulls to reach new highs in the S&P 500 and that the deck is stacked against them.  However, they have pulled many rabbits out of their hats, so here’s how a rally would need to unfold.  Today and Monday are key because they contain the most likely negative reports–Chicago PMI, Consumer Sentiment and ISM Manufacturing–for nearly two weeks.  The second week of November features no major report until Thursday, and even then, nothing likely to be interpreted too negatively if equities are up.  The third week is much more difficult and begins with Retail Sales on Monday at 8:30 am, then PPI, Industrial Production, CPI and Housing Starts.  Back to the present, if bulls can get over this two day hump, and FOMC next Wednesday and Employment Situation next Friday support, there is a chance of another short covering rally with new material highs.  As we have written before, FOMC is unlikely to say anything that rocks the boat, and many of their policy changes are being announced in separate press releases.  Barring the perfect bull storm outlined above, we still expect sideways to down action for November.

Trading Today:  As we write, the two 8:30 am reports have not moved the markets much, so the two reports prior to 10:00 am today will be the catalysts if they are out of line with expectations.  We prefer to be…

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As we have now reentered the highest volume value area and slightly exceeded its point of control at 1063.00 (also just shy of weekly S1), absent an unlikely selloff on the close below 1055.50, longs should be able to continue the push into month-end, tomorrow.  However, as we noted in the morning report, it is a heavy news day, so attention is warranted.  Monday, ISM will likely disappoint, but Wednesday’s FOMC announcement and Friday’s Employment Situation are statistically bullishly skewed over the last two years, so the current mini-rally could conceivably take the ES to test ~1080, or even the ~1100 high by next Friday.  This is the ideal scenario for the longs; however, there appears to be more that can go wrong for the bulls than bears, with shorts able to seize on weakness more easily.  Today’s call was relatively easy given the GDP gift.  We don’t expect to many others in the near future.

10:09 am EDT:  After the open, the ES sold off to the daily pivots, rallied to just short of the pre-open high at 1050.00, sold off lower to daily VWAP, but has now been able to break to new highs.  1053.00 to 1055.50 should still be watched as a potential reversal area (right there now), but the ES should be able to reach 1063.00 today.  If the high is less than 1055.50 today, tomorrow could be another down day.

The Precise Take – GDP satisfies, equities need to prove themselves with a rally

Leaders Analysis:  Overnight, the EuroYen tumbled more, to near its 61.8% key support that we updated on yesterday.  Gold advanced overnight after hitting the bottom of its trend channel yesterday, the US Dollar is up immaterially, and 30 Year T-Bonds are relatively unchanged ahead of GDP.  Overall, a slight equities bullish bias.

Medium Term Analysis:  We have been expecting some small oversold bounce the past two days but it has taken a 3.5% GDP (in line with expectations, except Goldman’s) to provide the juice.  Given the market internals and leaders reactions as of late, we will not be so quick to expect another short covering rally to new highs as we have in the past couple months.  Rallies will be swift and volatile to shake out weak shorts, but we will view them as shorting opportunities unless the markets change posture significantly.  Tomorrow is an unusually full news day for a Friday that will cap a volatile week and the end of the month.  Though Chicago PMI tomorrow at 9:42 am (released 3 min. ahead of official time to subscribers) is not expected to be a market mover, it was a surprise at the end of last month that provided some early volatility to the trading day.  FOMC and Employment Situation next week may provide rallies for possible swing shorts.

Trading Today:  The ES sold off down to the monthly pivot yesterday at 1038.50 where it settled, and on GDP, has rallied to the confluence of the 50% retracement off yesterday’s intraday high and closing VWP at 1048.75.  It’s a bit surprising the rally has not moved farther in light of GDP delivering as expected, so while we’re still willing to…

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Below are the leaders we follow.  The levels we wanted to hold this morning (whether support or resistance) for an equities reversal have been exceeded slightly, especially in the EuroYen as the risk trade unwinds, though the close today remains and we are still within error tolerances deemed acceptable for government work.  If the respective trends continue, we’ll watch for the EuroYen to find support at the 61.8% retracement (magenta horizontal line), the US Dollar Idx at the 77.00 level (top of yellow trend channel) and 30 Year yields to find support at the 20 and 50 day moving averages, which are about to cross.

10:48 am EDT:  New home sales disappointed a bit and Goldman lowered its estimate for tomorrow’s GDP, which lessens the likelikhood of short covering ahead of the report.  We’re still mildly short term bullish today as long as the S2’s hold at 1049.75 (actual low 1051.00), but would be quick to cover if the market retraces up to the 1059 to 1064 heavy resistance area.  If the S2’s break, the next downside target is very strong Fib confluence at 1043.75 to 1045.25.  Yesterday’s 2 Yr auction ended up being a market mover, so even more attention will be focused on today’s 5 Yr at 1:00 pm and caution is urged around that time.