11:38 am EDT:  On its initial decline, the ES stopped short about two points of the daily S1′s, which were in the lower end of the projected range.  Concurrently, though, in the cash equity indexes, the corresponding levels were respected very closely (see below).  The ES has now rallied nearly to the upper end of the projected range, which is 1071.00 to 1072.50.  The Dollar is strong and the EuroYen weak, but US equities are rallying in the face of this.  Accordingly, there is still a possibility of a run to at least 1079.00, with the probability increasing the longer the ES remains in the upper range.

The Precise Take – Equity futures again quiet overnight ahead of Retail Sales tomorrow

Leaders Analysis:  The leaders are not saying much as they are mostly in yesterday’s range, except for 30 year T-Bond futures, which have had a bearish week and are posting  a nominal new low for the week overnight.  They are, however, at strong support.  All in all, the leaders are equities neutral

Medium Term Analysis:  Nothing new to add from the previous days’ commentary.  Retail sales could be a market mover tomorrow if it’s not within consensus.  After that, nothing major until CPI the following Friday.

Trading Today:  Similar setup to yesterday, with the ES oscillating around VWAP overnight and looking like it will open around the day’s value area.  The upper end of the projected range contains the daily R1’s and yesterday’s high, from 1071.00 to 1072.50.  The lower end contains yesterday’s low and the daily S1’s, from 1055.50 to 1056.25.  There is very little resistance above 1072.50, up to day-session-only R2 at 1079.00, so this would be a good day for the bulls to attempt…

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The Precise Take – ES consolidating after volatile after sovereign rumors fly

Leaders Analysis:  The leaders have retraced slightly the strong moves the made yesterday and are equities neutral.  We will be watching the US Dollar as it trades between strong support of 79.48 and strong resistance of 80.55.  A close outside this range will be a signal as to the next move in equities.

Medium Term Analysis:  The bailout situation is providing expected volatility, which we covered in yesterday’s intraday updates.  A new fly in the ointment is the blizzards in DC have disrupted the economic calendar.  Of note, (1) International Trade, previously scheduled for 8:30 am this morning, will be released at an unknown time today; (2) Bernanke will not speak today, but his prepared remarks will still be released at 10:00 am; (3) The Treasury Budget, previously scheduled for today, has been postponed to an unknown date and time; (4) Retail Sales, previously scheduled for tomorrow at 8:30 am, will be released the same time Friday; (5) Business inventories, previously scheduled for tomorrow at 10:00 am, will be released the same time Friday; (6) EIA oil stocks will be released Friday at 11:00 am; and, (7) EIA natural gas will be released Friday at 10:30 am.  The Treasury auctions of today and tomorrow in the 10 and 30 year are on schedule.  There may be further changes. 

Trading Today:  Overnight, the ES oscillated around VWAP and will likely open close to today’s value area.  Barring additional sovereign bailout news, we expect a range day; however, we only expect…

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Only this morning we wrote:

…[W]e have a quiet news week and the markets are sensitive to unscheduled news.  Overnight, equities are up on some bullish rumors regarding a Greek bailout.  Some have compared the situation to the Dubai events in late November that led to a quick selloff and rebound in world equities.  However, this situation is not to be taken lightly, as a Greek default would be three times as large as the Lehman bankruptcy, and could quickly devolve into another global crisis of confidence.  Accordingly, the markets are at the whim of the ECB.  If it bails out Greece, there will probably be a large short covering rally.  If it lets Greece default, there will probably be another selloff.  And, if it does nothing and Greece muddles through for the time being, there will probably be a series of minor rallies that lead to larger selloffs.  The moves generated by the first two scenarios will be very swift, so swing traders will need to be prepared to react just as quickly…

When news broke at about 11:30 am EDT that there was an agreement in principal for a bailout, equities rallied and the US Dollar fell, as expected.  However, a mere hour later, after the ES had rallied 19 points to 1077, Germany countered by saying it was not a done deal and there would be significant strings attached.  Accordingly, there is still much uncertainty in the markets.  For now, what likely would have devolved into a return to the 1040′s has been averted.  In the end, we believe a bailout with nominal strings attached (to save face) is very likely, but the intervening journey in the markets will be volatile as the details are filled in over the coming days and weeks. 

The 1080 to 1083 is the first critical resistance level that swing shorts will need to defend.  There is a historical tendency to clear important resistance levels overnight, evidenced by the fact that the gap accounted for fully 32% of the rally in the S&P 500 that began in March 2009.  Combined with the current news being generated overseas, if this area is to be exceeded, US traders should be prepared to wake up to a market that has already cleared it rather than experience it intraday.

There will be plenty of opportunities during trading hours, however, and a savvy daytrader can capitalize on these movements by correctly reading market signals, regardless of knowing the actual news that’s driving the markets.  A simple five minute candle chart with volume of the ES warned that the rumor would lead to a sustained rally when it closed nearly at its highs (within a tick) on high volume.   Ideally, volume would have been at least 100,000 (actual about 91,000), but the 8 point range that convincingly broke the downward trendline was sufficient to generate follow through short covering.  Also important was that the ES looked like it was headed for trouble and sentiment was very negative following the failure just above the previous day’s high.  The entry can be made on a stop basis one tick beyond the big range bar, with a two point stop loss. 

In general, the larger the wick or shadow of a big range candle, the less likely a continuation of the move is.  This so-called indecision area is just that–it conveys doubt and will encourage profit taking and counter trend traders, which will tend to halt the move.  This is why a short based on the big-down 12:45 pm candle was not a good candidate for a continuation move (besides the fact that the stop sell entry signal was not triggered).  The two point shadow at the bottom was enough to make a material retracement to the 50%-61.8% fib box likely.

The flipside to potential entries is that, in this environment, exit stops placed on day trades are crucial because it is easy to get caught on the wrong side when surprise news is announced.  Indeed, a long entered on the above basis would have given up 100% profits on the 12:45 pm bar.  Accordingly, on steep moves, a simple trendline break can be a profit taking cue, as can a move that exceeds an interim pivot bar on the 5 minute chart.

Moves like today do not occur frequently, but when they do, often follow a predictable pattern.  We should see more in the coming weeks, so be prepared.

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12:12 pm EDT:  No sooner had we published our last missive when it was looking like the ES would revisit yesterday’s low, when Reuters reported that governments are now hammering out a Greek bailout.   EuroYen and ES rebounded instantly and are making new daily highs.  The ES should be able to test the critical 1080 to 1083 resistance area by early tomorrow.  If it fails there or below on this bullish news, that is very bearish for equities.  However, if it can power through, bulls will gun for the 1100 level.

11:11 am EDT:  Though the ES bounced precisely off the daily R1′s just after the open, it only managed to exceed yesterday’s high by a tick before retracing and mounting a minor rally that was only able to exceed by another point (high 1069.75).  A bit disappointing for longs given the continuing US Dollar weakness and the bullish pre-market setup.  Notably, the EuroYen has retraced about half its overnight gains, which is equities bearish.  We wrote that if there was a return to the lower end of the projected range (1059.25 to 1061.75) after the first 60 minutes, we did not have confidence it would hold.  Indeed, the ES will probably sell off now to at least the 1053 to 1056 support area.

The Precise Take – Equities poised for rally attempt

Leaders Analysis:  The EuroYen rallied overnight, trading above its weekly pivot.  The US Dollar Index is down, but has not traded below its weekly pivot.  30 Year T-Bond futures are down as well after failing overnight at yesterday’s day session high.  The leaders are the most equities bullish since February 1, which was the first of a two day rally attempt.  That rally failed, but it looks like today will be another attempt.

Medium Term Analysis:  As we wrote yesterday, we have a quiet news week and the markets are sensitive to unscheduled news.  Overnight, equities are up on some bullish rumors regarding a Greek bailout.  Some have compared the situation to the Dubai events in late November that led to a quick selloff and rebound in world equities.  However, this situation is not to be taken lightly, as a Greek default would be three times as large as the Lehman bankruptcy, and could quickly devolve into another global crisis of confidence.  Accordingly, the markets are at the whim of the ECB.  If it bails out Greece, there will probably be a large short covering rally.  If it lets Greece default, there will probably be another selloff.  And, if it does nothing and Greece muddles through for the time being, there will probably be a series of minor rallies that lead to larger selloffs.  The moves generated by the first two scenarios will be very swift, so swing traders will need to be prepared to react just as quickly.  First critical resistance in the ES is 1080 to 1083.

Trading Today:  As we wrote above, equities look like they will attempt to rally today.  Barring surprise news, there is nothing scheduled that would facilitate a large move.  The lower end of the projected range is 1059.25 to 1062.75, which includes the day’s value area and the likely half gap.  However, we have confidence in it holding only for…

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The Precise Take – Markets quiet overnight ahead of slow news week

Leaders Analysis:  The US Dollar Index advanced above, but then closed below strong resistance Friday, and is down marginally overnight.  The inverse is true for the EuroYen as it usually trades in the opposite direction of the Dollar.  30 Year T-Bond futures closed over strong resistance and have backed off marginally overnight, with the yield finally breaking down below a long term trendline ahead of three large Note auctions this week.  It looks as though the uptrend in yields will confirm a  downward reversal on the first good auction this week.  Given the recent international turmoil, demand should be solid.  The leaders are the slightest bit equities bullish.

Medium Term Analysis:  This is a relatively quiet news week with no top tier reports scheduled.  Retail Sales on Thursday and Consumer Sentiment on Friday could move the markets a bit.  Accordingly, any political or sovereign news will probably provide the impetus for the next major move.  Barring that, today we expect range bound action.  Should the ES be able to mount a minor rally, 1080 to 1083 will be the first major resistance area. 

Trading Today:  The ES has oscillated overnight roughly between the weekly and daily pivots.  This range will probably be broken, but only nominally.  Accordingly, the upper end of the projected range includes…

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2:14 pm EDT:  While we did get a more than ten point tradable bounce after hitting 1052.25 early, the second trip down to test the overnight low proved too much and the ES has sold down to just below monthly S1 at 1042.00.  Next support is long term pivot confluence from 1033.75 to 1035.75, then volume support at the Nov 2 09 swing low at 1025.00 on the ES continuous futures chart.  We won’t necessarily get there today, but probably some time next week. 

The US Treasury is benefitting from this, as the 30 Year yield finally broke through long term trendline and moving average support, which will make debt service costs a bit cheaper for it on the 10 and 30 yr issues its auctioning next week.  To put things in perspective, it took a 9% correction in equities to facilitate a 2% rally in T-Bond futures.  For now, it looks like this correction will eventually reach 15% or more, which makes for at least a 980 (ES) downside target.  That doesn’t mean there won’t be large up days, but the prevailing trade will be to sell bounces, and that will likely last for several more weeks.

9:45 am EDT:  The ES has already sold off to weekly S1 (1056.75) pre-market and opened in between the 4:00 pm and 4:15 pm closes.  This changes the game plan a bit as, any contrarion benefit of fading the gap is gone.  If the ES heads lower, we should get a tradable bounce somewhere 1050.50 and 1052.25.  However, this is a slightly agressive long because it is below weekly S1.  To the upside, we still like 1068.00 to 1069.00 as a possible short.