We mentioned the broadening megaphone/wedge pattern in the morning report and how it tends to lead to shakeouts before resumption of the up trend.  We would need a material move below yesterday’s low of 1126.25 to confirm that this pattern has reasserted, so it’s too early to tell if today is part of it, or if the ES will return to highs again before the real shakeout occurs.  However, we did mention the similarities between now and the October earnings season.  In fact, the similarities have only increased because there is now a 3 consecutive day large range reversal pattern, just as there was in October.  Given the lack of volume support down to 1109.00 in the ES, swing longs should pay heightened attention to yesterday’s 1126.25 low.

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9:36 am EDT:  The ES is opening very close to the lower end of the projected range, which is 1135.75 to 1136.00.  The day-session-only pivot at 1141.25 will now be formidable resistance and is a sell area.  If 1135.75 does not hold, we will consider a long between 1131.25 to 1132.75, but it is slightly aggressive.  Would be patient and wait for divergence, double bottom or other short term pattern.

The Precise Take – Equities looking to consolidate yesterday’s gains on strong US Dollar

Leaders Analysis:  The leaders did pause yesterday, just long enough for equities to post a sizable gain.  However, the US Dollar Index and EuroYen have resumed their trends, the Dollar now testing the December highs and the EuroYen in the upper end of a large support band that extends to May, 2009, which has held five times.  30 Year T-Bond futures look a bit stronger than yesterday after having rebounded from what could have been a sizable selloff.  All in all, the leaders are still slightly bearish.

Medium Term Analysis:  What a difference a day can make.  Though the ES was able to climb back to the upper end of its trading range, it is forming an expanding wedge (trumpet) formation on the daily.  Since the 2009 rally began, these patterns typically have led to a sharp selloff (sometimes as brief as one day) before resuming the uptrend.  Notably, this last occurred during the Q3 2009 earnings season in the fourth full week of October, which would line up with next week on the news calendar.  What this suggests is that, if longs cannot break the range materially and get another rally started by Monday’s close, downside rather than upside is likely.

Trading Today:  Given yesterday’s large range up, we expect consolidation of that move today.  The lower end of the projected range is day-session-only S1 in confluence with the weekly pivot from 1135.75 to 1136.00.  The upper end is yesterday’s high in confluence with contract highs from 1147.00 to 1148.00.  However, the ES may only be able to muster…

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