Below updates a previous chart we posted that breaks up the day into time segments (all times EDT) and plots net points for each period.  Since the January 2010 highs, the first hour is where most of the losses have occurred, even during the most recent upswing.  Since the February low, each other period in the rest of the trading day has been net profitable, though the closing hour the least so.  The 1:30 to 3:00 pm time of day has been the most profitable intraday period for longs since the 2009 rally began.

Looking farther back to 2001, we can see glean some interesting information.  The first hour of trading was consistently profitable beginning late 2003 during the last bull market.  It posted its high in July 2007, three months before equities actually topped.  It also bottomed concurrently with the markets in March 2009.  Similar to 2003, it was unable to trend up for most of 2010, but took off late in the year.  As previously noted, it has since retreated and we believe will need to start turning profitable if the January highs are to be taken out.

The only other time period that was consistently profitable during the 2003 to 2007 bull run was the overnight gap.  If it were to break its current trend line, that would be a very bearish sign.  What also emerges is that, contrary to popular believe, a profitable closing hour is not necessary to sustain a bull market, but may be necessary to start one.  The closing hour’s high was put in January 2004 and trended down thereafter.  The closing hour’s high in the current 2009 rally was established in September.  It may well be that smart money now trades at the open.

Accordingly, if we start seeing overnight gap-ups and profitable first hours, things may have turned around for equities.  If not, we’ll probably see lower prices in March.

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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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.

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.

Click for large image.

The 114.18 high volume level has now been reached.  In the chart below it does not appear to be a high volume level because the area between 111.15 to 114.18 has recently been filled in.  The next target is 116.17; however, a drop back to 111.15 is possible if SPY stalls here.

Click for larger image.

We have compiled the following long term charts that show points accumulated overnight (just ahead of) the Employment Situation report, then during the day session on the day of the report, and the combination of the two. 

 
Above is Feb 94 to Dec 09, and below is a zoom in of Sep 08 to Dec 09.

For 2009, Jul 09, Oct 09 and Nov 09 were negative gap days.  The day sessions were positive Aug 09 to Nov 09, but negative Dec 09.  What’s interesting in the longer term chart is that day sessions were positive in SPY throughout must of the late nineties bull run, but were not so during the subsequent bull run.  Perhaps that’s indicative of the jobless recovery.  SPY bottomed in Oct 02 on a higher low in the day session.  After that, there was a rally in day sessions, but then there was a resumption in the down trend until Oct 08, that lasted even during the bull market into Oct 07. 
 
Meanwhile, the gap stayed mostly flat and resumed its uptrend in early 2005.  Further, during the entire recent down leg, the worst drawdown in the gap was 2.34 SPY points, with most of the losses to SPY overall coming during the day session.  Accordingly, holding overnight ahead of the report (at least since mid-2003) appears to be more profitable than holding during the day.  It should be noted that there are outliers where SPY has gapped down ~1.50 points and it is not uncommon to have ~1.0 point gap downs, so caution should always be exercised when holding into the report.

With markets always in flux, it is important to not only be aware of sector rotation, but of time rotation.  As we have demonstrated previously, trends emerge as to which time of day is best to be long or short.  In light of a recent Bespoke Investment Group study regarding bullish Mondays (htBilly), we have expanded their work to consider both the overnight gap and day sessions for each day of the week…

Mondays have been clearly bullish since September, 2009, with weekend holders of long positions not being punished since the last week of September.  This suggests that traders may have become complacent and that the next down gap could be a bellweather of a material correction.

Tuesdays have been a mixed bag since September, offering no clear edge.

Wednesday has had a slight bullish edge since November, when the gap and day sessions are considered.

Thursday days have been bearish since late October.

The last two Fridays of December were holidays and the one previous was flat.  Prior to that there was a strong surge overnight ahead of December’s Employment Situation report, but then it was dangerous to hold longs from Thursday to Friday morning since late September.  However, Friday days have largely been kind to longs since November except for on the December Employment report.

As we pointed out in our morning trading report, Employment Situation Fridays have been turning points in 2009.  They have either sparked rallies or been used by institutions to sell into, marking interim tops.  As we are now at highs, longs should take heed…

Click for larger image.

The Precise Take – Equities attempt to hold on to gains on the close of the month

Leaders Analysis:  Big reversals yesterday in just about everything and overnight, mostly consolidation.  30 Year T-Bonds look poised for another test of the upward boundary of the downward trend channel, so we will watch them closely today to see if they can break out (equities bearish) or reverse down (equities bullish).

Medium Term Analysis:  We wrote toward the close yesterday that it would take a near perfect storm for bulls to reach new highs in the S&P 500 and that the deck is stacked against them.  However, they have pulled many rabbits out of their hats, so here’s how a rally would need to unfold.  Today and Monday are key because they contain the most likely negative reports–Chicago PMI, Consumer Sentiment and ISM Manufacturing–for nearly two weeks.  The second week of November features no major report until Thursday, and even then, nothing likely to be interpreted too negatively if equities are up.  The third week is much more difficult and begins with Retail Sales on Monday at 8:30 am, then PPI, Industrial Production, CPI and Housing Starts.  Back to the present, if bulls can get over this two day hump, and FOMC next Wednesday and Employment Situation next Friday support, there is a chance of another short covering rally with new material highs.  As we have written before, FOMC is unlikely to say anything that rocks the boat, and many of their policy changes are being announced in separate press releases.  Barring the perfect bull storm outlined above, we still expect sideways to down action for November.

Trading Today:  As we write, the two 8:30 am reports have not moved the markets much, so the two reports prior to 10:00 am today will be the catalysts if they are out of line with expectations.  We prefer to be…

Continue reading here.

As we have now reentered the highest volume value area and slightly exceeded its point of control at 1063.00 (also just shy of weekly S1), absent an unlikely selloff on the close below 1055.50, longs should be able to continue the push into month-end, tomorrow.  However, as we noted in the morning report, it is a heavy news day, so attention is warranted.  Monday, ISM will likely disappoint, but Wednesday’s FOMC announcement and Friday’s Employment Situation are statistically bullishly skewed over the last two years, so the current mini-rally could conceivably take the ES to test ~1080, or even the ~1100 high by next Friday.  This is the ideal scenario for the longs; however, there appears to be more that can go wrong for the bulls than bears, with shorts able to seize on weakness more easily.  Today’s call was relatively easy given the GDP gift.  We don’t expect to many others in the near future.