The Precise Take – Equity futures poised to test yesterday’s high ahead of Employment Situation

Leaders Analysis:  As we noted intraday yesterday, the US Dollar Index broke major support and sold off sharply.  The bottom coincided with the end of the equities rally yesterday.  Overnight, the 20 day moving average, which prior served as support, became resistance.  The Dollar tends to consolidate after important moves, so we don’t expect another major move until tomorrow’s Employment Situation.  The other leaders are not making any moves of note, so the leaders are equities neutral today.

Medium Term Analysis:  Not much to add from prior day’s commentary.  Focus will be on tomorrow’s Employment Situation report, which is expected to be bad because of the February blizzards.  The ES is at a precarious point.  It needs to soon…

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Well, it took a bit longer than we thought, but the US Dollar Index has broken major support.  Two downside targets are highlighted below that each contain long term pivot and Fibonacci support.  With the ES close to entering the 1127 to 1147 range from January, any further downside in the Dollar would help equities power through resistance. 

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11:12 am EDT:  After several attempts, the ES finally broke through 1122.75 resistance and is heading to the next resistance level of 1126.00 to 1127.00, which includes day-session-only R2 and the upper end of the volume gap.  Above lie major resistance from weekly R2 at 1128.50, day-session-only R3 at 1129.25 and monthly R1 at 1130.50.  Although the projected range was broken, it took a while and low relative volume does not suggest there will be a trend day.  This implies that there should be a shorting opportunity somewhere between 1126.00 and 1130.50; however, we cannot project exactly where ahead of time and would need to rely on price action.  As always, fading a move outside the projected range is aggressive and requires experience to execute.

The Precise Take – Markets looking to consolidate ahead of Employment Situation

Leaders Analysis:  The EuroYen is on the verge of breaking to the upside after basing for several days.  Gold closed over its 50% retracement of its down leg and is up nominally overnight.  The 30 Year T-Bond yield is still hugging its long term trendline support, but has been spending more time below it than above, thus not confirming the other leaders.  The US Dollar Index is at the bottom of its trading range, which could be equities bearish, because it has rallied the prior times it hit this support level.  However, and very importantly, it is below its 20 day moving average, which has acted as strong support since the January 20, 2010 breakout.  A close below should finally facilitate a larger retracement downwards and help equities break through resistance.  If it closes above, it could move up to the upper end of its range again, which would probably be concurrent with a correction in equities.   For today, the leaders are slightly equities bullish.

Medium Term Analysis:  Today should be relatively quiet, but the action will pick up a bit tomorrow and get going Friday with the Employment Situation.  An expected poor headline statistic due to the harsh winter is now being widely discussed.  Regardless, poor readings that cause equities to gap down tend to get reversed intraday, and vice versa for good readings that cause gap ups.  Next week will be relatively quiet with some long term Treasury auctions, then Retail Sales on Friday.  Lack of news after Friday could cause some back and fill in equities if they have not cleared major resistance.  For now, that number is…

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The Precise Take – Equities to gap up again into resistance.

Leaders Analysis:  Overnight, the US Dollar Index rejected the same resistance area as the previous day and is back in the middle of its trading range.  We probably won’t mention it again until it breaks its range is it has not been predictive lately.  The EuroYen is basing and looks poised to rally.  Though the 30 Year T-Bond yield broke strong trendline resistance last week, it may be a false breakdown because it is up over the trendline again this morning.  All in all, the leaders are slightly equities bullish.

Medium Term Analysis:  What is notable about the level reached overnight in the ES (1122.75) is that it is the 76.4% retracement of the entire down leg, which would make the second such retracement in a row.  The February 5 low was a 76.4% retracement from the October low to the January high.  This pattern, which occurs intraday, is more rare on the daily, but can perform four or five such retracements in a row.  If the ES closes over 1123, the pattern is negated but, if not, 1060 is the next downside target.  Given the strength of yesterday’s rally, we expect follow through by tomorrow.  But amidst all the bullishness, we also feel compelled to…

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10:37 am EDT:  ISM came in with a Goldilocks reading of down slightly from January, but within consensus, which is bullish for equities because too-strong would have rallied the Dollar and too-weak would have hurt confidence.  The Dollar and T-Bonds are down, but curiously, so is the EuroYen, perhaps out of Eurozone weakness.  Accordingly, while further gains in the ES to weekly R1 at 1116 are in the cards today, a trend day up is unlikely.  To facilitate further gains today, we would want to see VWAP hold around 1109.  Otherwise, a test of the lower end of the projected range is likely, from 1102.00 to 1103.50.  We’ll have to issue the standard caveat regarding surprise political news (which has occurred frequent recently), but otherwise, we don’t see an impediment to an equities rally over the next few days as there is no major news until Friday’s Employment Situation.

The Precise Take – Equity futures higher overnight ahead of ISM

Leaders Analysis:  After selling off to its 20 day moving average Friday, the US Dollar Index rallied strongly overnight on British Pound weakness to the upper end of its two week range.  The EuroYen traded first up, then down, and is at Friday’s low.  The 30 Year T-Bond yield closed decisively below long term trend line support Friday and is up marginally on the open.  A continuation of the trend down in yield (and up in the futures) does not preclude equities gains, but a concurrent US Dollar rally would make any equities gains more difficult to come by.  With ISM Manufacturing today, the direction could be set into Friday’s Employment Situation report.  For now (at least until 10:00 am), the leaders are slightly equities bearish.

Medium Term Analysis:  The ES was strong enough overnight to test the most recent swing high at 1112.75 and subsequently traded down on the US Dollar rally.  However, it is accepting in the green value area (below).  If it continues to accept here or rally after ISM today, the next…

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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.

The Precise Take – February poised to close on a volatile note.

Leaders Analysis:  Most of the leaders reversed yesterday in line with the afternoon equities rally.  The US Dollar Index is forming a consolidating wedge and is one to watch.  If it were to top this week, we thought it would have done so more convincingly by now; however, as long as it is consolidating, it can still do so, but needs to do so soon.  The 30 Year yield is trading at long term trendline support that has three points of contact since late September, having bounced most recently earlier in the month.  A break down should lead to a test of at least the 200 day moving average, currently at 4.40%.  A concurrent Dollar decline and equities rally is not out of the question, but would be slightly unusual, so this will be an important leader to watch.  A bounce would lead to a retest of the 4.75% level and possible break.

Medium Term Analysis:  Yesterday proved to be a difficult day to predict, as the 1082 to 1085 support level in the ES that we had dismissed the day before indeed proved to be strong support.  Overnight, the ES rallied but rejected the 1107.50 high volume level we have been watching.  Until the ES accepts around this area, it will not be able to move higher.  With three reports today between 9:42 and 10:00 am and rumors regarding Greek debt, there should be…

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10:37 am EDT:  Despite the strong gap down and negative breadth, the day session is relatively quiet with no extreme NYSE Tick readings.  Barring a surprise news event, we don’t expect a trend day down.  1092.50 to 1093.75 should still provide enough resistance to get a day trade short out of it.  We would peg the max low at at 1082.75 and the max high as 1096.25 to 1097.  A close above 1097 keeps the bulls alive for another day and points to a possible bear trap this morning.  A close below 1090 still presages a test of the 1060 to 1070 area.