1:37 pm EDT:  All the leaders are confirming equities strength, so we would be surprised to see an end to the rally here.  As we wrote in the morning report, the reaction to the Fed’s Beige Book will be key, but not as critical as when  the ES was trading in the lower 80′s.  The ES has found support at yesterday’s point of control in confluence with overnight highs (actual interim low of 1091.25).  If the ES dips on the release, we would want to see any foray into the 1089.00 to 1092.00 area quickly rejected to support the long position.  If the ES can test highs again, they have a good chance of breaking, with upside targets of 1102.25 and 1107.25.  Swing longs still want a close above 1089.00, especially ahead of tomorrow’s Jobless Report at 8:30 am.

10:57 am EDT:  The EuroYen was the correct leader to watch, as it broke through 136 resistance a full 15 minutes prior to the open, upon which equities rallied out of the gate.  The ES has found resistance nere contract highs in confluence with combined session daily R1.  However, the ES is likely to reach one or both of the daily R2′s at 1102.25, then 1107.25.  Pullbacks will likely be shallow until the high is reached.  Only a return to below the day session only pivot of 1089.00 puts the rally in question.

The Precise Take – ES testing critical support for longs

Leaders Analysis:   Mixed signals: gold and crude backed off a bit yesterday and overnight, but 30 Year T-yield futures have also retreated a bit after hitting a key 50% retracement yesterday.  The market to watch today and tomorrow appears to be the EuroYen forex cross, which has formed a bull flag on the daily chart at resistance.  If it can break through 136 convincingly, equities will likely resume the rally after yesterday’s hiccup.  If it falls below 134.7, the correction should be deeper.

Medium Term Analysis:  As we wrote last Friday and Monday, the housing reports this week were supposed to have provided lift ahead of next week’s more difficult reports (Durable Goods, GDP & Personal Income).  Instead, they have disappointed.  With the ES overnight nearly testing the weekly pivot of 1080.25 (which forms the upper range of critical support for this rally), equities need a new catalyst.  It will be interesting to see how the Fed’s Beige Book (which the FOMC uses to guide policy) is spun this afternoon at 2:00 pm.  With rumors of tightening circulating, weakness in economic data could be interpreted as a catalyst for an extension of Fed easing, which is bullish for equities (as illogical as this may sound).  If weak numbers lead to an equities sell-off, than it is a sign that, easing or no easing, there is some sense returning to the markets and the great hope rally of 2009 needs more fundamental support.  Leading indicators tomorrow at 10:00 am and Existing Home Sales at 10:00 am Friday are also major reports to be watched.

Trading Today:  Overnight, the ES sold off just above yesterday’s market profile point of control and broke through the trend channel that began on Oct 7.  However, price continues to trade in the highest price value area (shaded green below), of which 1084.25 is the point of control.  Unless and until the ES accepts below 1078.00, the rally is not in jeopardy.  As we write, Wells Fargo earnings have provided a minor boost to the ES, taking it to overnight VWAP at 1086.00.  We would be early buyers anywhere from…

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