So far, the decline has unfolded in accordance with the scenario laid out in the
Morning Report for 12/13/2011. Chart 1 below depicts the price action in the ES through Wednesday, excluding the low-volume overnight data.
During the overnight session, price made a marginal low, briefly spiking below the 100-day AND 100-week moving averages. It also came within a couple of points of the 61.8% retracement line and the open gap before reversing course.
Chart 1. So far, the decline has sported an orderly, corrective look.
Despite the green arrows on the TV screen this morning, price still has much work to do if the goal is to bounce back to the top end of the range near 1265. Chart 2 below illustrates the market auctions that have taken place over the last few sessions, highlighting the 'high value nodes' that price will likely levitate to in the course of the next few sessions, barring any bad news. The mid-to-high 1230s and low 1240's areas are of particular interest and should be closely watched, having preceded the breakdown that ensued the
disappointing Fed announcement. In the event that price does manage to break through, the next logical hurdle is the 1257 magnet, the flat level for the year. I'll be very surprised if the very top of the range (i.e., the 1265 area) is reached.
Chart 2. Market profile chart.
In light of the above, it's reasonable to expect price to trudge along higher for the next several days, especially on improving U.S. economic data points and a relatively muted news flow from Europe (one can only hope). However, I'm inclined to only trade the short-term charts through the end of the year, avoiding the temptation to hold any positions overnight. Also, at the risk of sounding like a broken record, I'm especially looking forward to
Cintas's earnings next week.
Longer term, I do see a reasonable likelihood for a painful start of the new year, unlike the two previous years. I'll expand on that further in the coming days, but take a quick look at this 2-day chart of the Nasdaq 100 (chart 3), realizing that not every HS-looking formation is a true Head and Shoulders. It's something to keep in mind, though, especially in light of the recent post concerning
Cloud Computing. These charts had better self-repair soon to invalidate my bearish outlook.
Chart 3. A possible HS formation on the 2-day chart of the Nasdaq 100. A bearish divergence was created at
the armpits level, followed by a bearish convergence at the head and right shoulder.
Finally, the S&P yesterday fell below the lower red trend line shown on chart 4. To me, this is the line in the sand that divides the bull and bear territories. I'll be carefully watching the action today, looking to see if price can gather enough momentum to not just re-enter bull country, but also to spend the next few nights in it.
Chart 4. The lower red trend line marks the dividing line between bull and bear territories.
Very soon, price will show its hand; it's either 'climbing a wall of worry' or, to quote Robert Prechter, 'descending a slope of hope'.
Trade Well,
Peter