The Precise Take – Equities looking to consolidate after two day losing streak

Leaders Analysis:  The US Dollar Index was not able to close above its December swing high and has rejected strong resistance.  Accordingly, it looks poised to retrace a bit of its recent gains, which should help equities.  The EuroYen tumbled yesterday to the bottom of its wide support band, broke through to the downside marginally overnight, but has recovered.  30 Year T-Bond futures were able to capitalize on equities weakness and push through strong moving average resistance.  However the 30 Year yield is now testing 50 day moving average support, which historically has given it at least a pause.  All in all, the leaders are equities bullish.

Medium Term Analysis:  The general chatter is that the rally that began in 2009 is showing major cracks.  While we agree, this does not preclude another run up or new material highs.  FOMC and GDP next week could be catalysts.  A major reason for the swiftness of decline yesterday was that the retracement was through an area that was traversed upward over the holidays on low volume.  The ES has settled into an area that has more volume support, so a repeat of yesterday is unlikely, and further declines, if any, are likely to be more orderly.

Trading Today:  We’re expecting a higher close, but there is a chance of a further washout after the open, down to the daily S1’s in confluence with weekly S3 (1101.00 to 1103.25), which marks the lower end of the projected range.  For this area to hold, we want to see…

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11:46 am EDT:  After a brief rally on the open to within one tick of yesterday’s day session high (1138.25), a trend day down is materializing.  As an aside, this is the first time that weekly S1 has been penetrated since the last week of October 2009.  There is strong confluence support from the monthly pivot at 1106.00 to a high volume area at 1109.00, which also roughly coincides with trendline support on the 81 min at 1110.  This is the eventual target into tomorrow’s open.  We do believe there will be another test of the 1140′s, but we’ll have to see if the target support area holds before getting to excited about it. 

The Precise Take – Equities attempting to defend the two week trading range

Leaders Analysis:  The US Dollar Index broke through its December swing high overnight but has met strong resistance from its 200 day moving average and a 50% retracement from the May 18 09 high.  A close above 78.69 will signal traders that this is more than just a one leg up short covering rally and that there is more upside to go.  The EuroYen, however, is up marginally off its brief foray into the strong, wide support band we noted yesterday.  30 Year T-Bond futures have also stalled at their 50 day moving average.  All in all, the leaders are equities neutral, with the possibility of being tipped either way based on the US Dollar’s behavior today.

Medium Term Analysis:  The ES held support yesterday, just barely, and the longs managed a respectable close.  However, traders seem to increasingly lack conviction about the current trading range holding value.  Given the pattern we pointed out yesterday, longs will need to make a push to at least 1144.25 (weekly R1) and hold that area to prove they can move higher.  A quick rejection signals a likely return to and break of the bottom of the range (1125 to 1126) area.

Trading Today:  The upper end of the trading range today is yesterday’s day session high to just above day-session-only R1 (1138.50 to 1140.50).  The lower end is day-session-only S1 at 1126.75 to a high volume level from yesterday at 1127.50.  As we write, the ES is selling off to test…

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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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11:03 am EDT:  Though we were not able to give much guidance as to the expected direction pre-open, we were correct to suspect the projected range would not hold.  Now that the 61.8% retracement of the down leg from contract highs has been exceeded, the shorts are having to scramble.  Weekly R1 in confluence with Friday’s high (1144.00 to 1144.25) is a reasonable upside target for today.

The Precise Take – Equity longs attempting to defend lower end of trading range

Leaders Analysis:  30 Year T-Bond futures are down marginally overnight after stalling at moving average resistance since last Thursday.  The US Dollar Index is stronger overnight, with the EuroYen correspondingly weaker.  However, they are both at interim levels where they could reverse or stall.  This makes the leaders overall only mildly bearish.

Medium Term Analysis:  As shown in the chart below, overnight, the ES tested 1126.25, below which there is no volume support.  However, it has rejected it soundly with the ES rallying six points as we write.  This indicates that longs are buying the lower end of the trading range, which is roughly 1126 to 1148.  If it gives, the next downside target is the 1109.00 high volume level.  However, if the ES can break up through the downward trend channel, it should be able to test the upper end of the range again.  There are several housing related reports this week, but no top tier news items, so the focus will be on earnings.  Next week features an FOMC Announcement on Wednesday and GDP for Q4 2010 on Friday, the last trading day of the month.  It’s worth noting that expectations are becoming more bullish for this preliminary estimate (which will likely be revised materially in the coming months), with some estimates north of 5%.  We expect the markets to chop around over the next week; however, January should end with volatility.

Trading Today:   The lower end of the projected range is the overnight low of 1126.25 to Friday’s low of 1127.50.  Shorts will defend the upper end that extends from 1134.25 to 1137.00 and which includes today’s value area.  However, there is a good chance that…

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The Precise Take – ES up marginally on US holiday

Trading Today:  Just the charts today.

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10:16 am EDT:  The ES opened in today’s value area and could not push through.  As expected, it has now reached the lower end of the projected range of 1132.25 to 1133.75.  The speed of descent makes longs aggressive.  If the ES trades back up to day-session-only S2 at 1136.75 and sells off, then there could be more downside to go, the next target being the high volume level at 1128.75.