10:52 am EDT:

Short term: Our critical point of control at 994.00 did not hold (low of 992.50), so we won’t look for anymore longs unless the 1:00 pm 3 Year auction is a disaster and gives equities bullish momentum.  Until then, we would short in the 998 to 1000 area, which includes Fibonacci, and volume-based VWAP resistance.  However, if this turns into a directional day, we likely won’t see that area and will have missed the move.  For any shorts out there, the next downside target is  983.75, with 983.75 to 987.00 containing several forms of support to slow the market.

Long term: Our ongoing theme is that the Fed needs a temporary stock market correction in order to let yields calm back down.  Whether this is the start of it, or merely position squaring ahead of tomorrow’s FOMC Announcement remains to be seen, but we will likely know one way or another by Thursday.

The Precise Take – 10 Yr Auction Resounding Success but H&S neckline decisively broken

The greatest Treasury auction of the year sent bonds vertical with steep drops in rates across the yield curve.  The short covering in long dated Treasuries has begun and mortgage rates look like they will again drop below 5%, so all is well in the land of Ben.  Except that equities had to fall on the sword, which was a direct cause of the sharp contraction in money supply.  Eventually, the FR printing presses will be kicked into high gear again and we expect that will support equities, but as we have warned before, this is a dangerous game for Bernanke to play and much to go wrong.  See page 2 for an important analysis of another game the Federal Reserve is playing through permanent open market operations and the trading implications for today and tomorrow.

Gold has broken key support on quelled inflation expectations and the US Dollar was marginally stronger yesterday (except against the Yen which saw a giant drop), though the Dollar has given back most of its gains overnight.

In the ES, the first downside target of 866.50 (long term Fibonacci confluence on the continuous futures chart) provided support to the tick, and after a second breakdown to 865.25 (trend channel support in the below chart), it was able to recover into the close.  We are bullish today, but will be more confident being so upon a break up through yesterday’s 883.50 high, which would also break very steep trendline resistance (also below).  Upon a break of a head and shoulders neckline, there is usually a retest of the neckline and often it is exceeded somewhat just to shake out the weak shorts.  Accordingly, we believe a reversal to the downside will either occur in the 888.00 to 893.50 area, or more likely, the 901.00 to 907.00 area.  If the ES cannot break 883.50 today, it is more likely that we will get new lows into early next week and get the retest of the neckline next Thursday.  In the unlikely event that 907.00 is exceeded, we expect…

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Got the Globex range breakout but no short covering yet…Also, 941.25, the new highest price point of control could still serve as resistance.  As we write, the ES has not been able to take out 940.00.

Marty Chenard points out that the KBW bank index (orange) was at trendline support this morning that needed to hold for the financials to keep afloat.  We also add that the Nasdaq Bank Index is at resistance, which has held it from advancing several times since April.  A breakout could finally take the S&P up with it.  Conversely, a failure could take the S&P down.  Symbols to watch are $BANKX and $KBW in TradeStation.

5:14 pm EDT:  No major pullbacks until about 3:20 pm, when the market retraced to VWAP and tested highs again, before closing at VWAP (~939), which is also by tomorrow’s day-session-only pivot (938.50).  ES now trading at 938.75 as we write.

Overnight, we expect today’s primary point of control at 941.25 to provide resistance.  Above, there is a countertrend short at 945.50, then day session highs at 947.25, which also correspond with tomorrow’s day-session-only R1 (947.75).   To the downside, we expect 930.75 (today’s secondary POC) to 931.75 (50% retracement of day’s move) to provide greatest support, though 924.25 (minor POC) to 924.75 (50% from Friday’s lows) will also offer support.

…with no notable pullback with longs hitting asks in size at highs.  The day is looking a lot like May 18.  Per our morning report, 911.75 is the last holdout for the shorts.  Sometimes these days get large reversals in the afternoon.  Watch for a 5 minute pivot to be taken out along with the 1st standard deviation of VWAP after hitting resistance.

Next support confluence area is 875.25 to 877.50.

See below for our market internals chart that shows VIX breaking a minor trendline support (second down) and NYSE adv:decl ratio right at trendline resistance (third down).  If VIX goes down and adv:decl goes up, we likely have a bottom into tomorrow.  We will update on a confirmed break, if it occurs.  S&P 500 financials as measured by the XLF ETF have held up well, NASDAQ bank index not as well, but no new lows since just after 11:00 am.  Market has sold off on VWAP per our earlier post, so we want a break of  889.75 to head higher (testing now).

Nasdaq bank index has reversed the entire week’s gain and taken out Friday’s support.  Our critical support area for the day did not hold, but the market has found marginal support in the ES in the pivot/gap area.  Low at 907.00.

Traders will be looking for the Fed’s thoughts with regard to Please Login or Register to read the rest of this content.

We will be posting the Precision Report here tomorrow morning at the scheduled time.