1:07 pm EDT:  It took a while to get started, but sellers took hold again at about 10:00 am, taking the ES down to the daily S3′s, after which there was a relief rally up to VWAP.  The ES is now making new lows and the 1056 to 1060 major support level is in sight.  We have been anticipating a short covering rally at some point, and will repost one way in which it could get started.  From Gaming the Market:

PPT Day Characteristics

These moves typically occur after 2:30pm Eastern while the market is near a new low or breaking point, with a relatively high VIX.  Another characteristic is a large NYSE Adv/Decl negative ratio.  One that is negative 10:1 going into lunchtime typically assures a weak close.  Ratios of 3:1 negative aren’t what you want. They are easier to manipulate by weak bulls. You want a big scary ratio. It is these negative internals that can clue you into the probability of a PPT push.  A big push on a big negative internal is the tell. To instantaneously swing the market around on these days takes a massive amount of concerted capital.

If you watched the market every day last year you know what this looks like.  Using 5min candles on your favorite index you will see an immediate and massive full body candle, sometimes eclipsing the entire day’s range in minutes.  There is no mistaking this move. 

If the ES gets down to critical support in the next few hours, today would fit the above criteria.  It’s important not to front-run this setup as further downside is possible.  Just something to be on alert for.

Update 2:39 pm EDT: It looks like this selloff is in response to a half baked scheme to ban short selling in Germany with just a few hours notice.  The news could have major repercussions in the markets over the next few days.

2:24 pm EDT:  To continue the Market Profile-based discussion from the morning report, the ES failed just as it was entering the next higher value area and did not respect the 1126.00 high volume level after heading lower.  Accordingly, the ES will likely need to base more in the (purple) value area before heading higher.  Once it accepts above today’s high of 1147.50 in the next higher value area, it has a good shot at another up leg.  A break of yesterday’s low of 1112.75 should lead to a test of at least ~1098 support.

The signs of instability and illiquidity were mounting, but we would not have believed it ourselves had we not had a front seat (again).  The markets have indeed returned to crisis mode not seen since the collapse of Lehman, and day trading with small stops in heavily leveraged instruments is quixotic.  We will, however, publish the report tomorrow on schedule.  Unless you are very experienced, it would be wise to lower leverage or stand aside until the markets calm.

10:09 am EDT:  This is some wild west trading.  Important technical levels are blown through and reversals are taking place at arbitrary places.  We mentioned day-session-only S-1 at 1162.75 needing to hold as resistance for the first 30 minutes (as an indication of a possible trend day down) and it was actually exceeded to the upside seconds before the deadline.  This prevented some program selling but is probably a bit arbitrary.  What’s helping the rebound in equities from the panic selling is that the Euro reached its critical support cluster and is reversing.  This could set up a multi day low and will help pare (but not necessarily prevent) further equities losses.  If 1.2789 in the cash/forex is broken, however, the selloff has much further to go.  The 50 day moving average in the ES, which was support yesterday, is resistance today at about 1165.  If the ES can climb above, the worst is likely over for today.

10:11 am EDT:  The ES broke down prior to open and has found support near last week’s low.  This should be the beginning of the down leg, but we want to see 1186-87 hold as resistance on any bounce.  Next lower potential reversal areas are as follows:

1174.75 to 1176.75: day-session-only S3, fib, last week’s low
1168.00 to 1169.75:  weekly S1, fib, high volume level
1159.75 to 1161.50:  fib, monthly S1 and high volume level

10:36 am EDT:  So far a quiet, low volume day in the ES.  ISM was better than last month but within concensus, and it turned out to be non-event for the markets.  Barring unexpected news–which is a possibility with Greece–today should remain quiet.  So, the projected range and potential reversal areas from the morning report remain in play.

10:25 am EDT:  Chicago PMI was outright bullish and Consumer Sentiment improved, but was within consensus.  In a bit of market dejavu, the ES is down to its 20 day moving average on news that Goldman may face a criminal probe.  The difference between today and two weeks ago is that the distance to fall was not as far.  There is strong support from weekly S1, long term high volume level, and day-session-only S2, from 1190.00 to 1192.00.   A strong reaction off this level or above suggests this is just another mild shakeout.  If 1190.00 does not hold, there is no major support until 1182.75, at which point the recovery is in jeopardy.  Intraday resistance is now 1198.25 to 1199.25 and the initial breakdown zone at 1200.50 to 1201.25.

11:10 am EDT:  After a slow start, the ES finally rallied and is now testing the highest (price-wise) large high volume area at 1204.25.  An important clue of strength was that the daily R1′s in confluence with monthly R1 held (the morning report incorrectly labelled the latter as the monthly pivot).  1200 to 1201 is now support.  If the ES accepts above and builds volume through the day, there could be a retest of ~1215 into tomorrow and possible break through.  If this area is rejected, recovery of the rally could take longer.  A close below 1195.00 makes the recovery suspect and a close below 1190 (unlikely) means there will probably be lower lows.

12:15 pm EDT:  It’s time to throw FOMC seasonality out the window as it is being overridden by more ratings downgrades, this time to Spain.  This does not mean a selloff is imminent, but that the usual eb and flow of this day should not necessarily be expected.  Having said that, barring a gift from the Committee in the form of an announcement more dovish than the last, it’s difficult to see how equities mount a recovery in this environment, with more ratings downgrades likely.  Incidentally, these downgrades appear to be coming at the top and bottom of each hour before noon.  If you are a very short term trader (scalper), it may be wise to be flat around the :00 and :30 in each morning hour.

Update 1:15 pm EDT:  @SpainConsultant (below in the comments): Yes, FOMC day has very bullish seasonality.  Rob Hanna at Quantifiable Edges just published a study that links the bullishness to closing the day before in the bottom 25% of the daily bar.  The bullish edge turns to bearish sometime between 2:30 pm and 3:30 pm tomorrow after the announcement.  This sets up a possible swing long into tomorrow’s announcement if today’s close is bad (bottom quarter of bar).  After the 2:15 pm announcement tomorrow, we’ll get some selling pressure and anyone wanting to short could do so then.  That means the real test of this rally is Thursday.  If ES closes lower on Thursday, then correction will probably last another week or two.  Otherwise, it will probably have been over already.

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Update 11:35 am EDT:  Greece was just downgraded to junk status.

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It took all of 30 minutes from the last post to get an unscheduled news event as Moody’s has now downgraded Portugal’s debt.  1194.75 to 1196.00 was strong support from the daily R3′s, monthly R1 and has now broken.  If the 20 day moving average and weekly S1, from 1190.00 to 1191.25, don’t hold on a closing basis, the rally is in jeopardy.  Having said that, the 20 day has been a buying point on the last two tests.  Below is an update of the chart we posted last week.