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03-MAR-2015 | Tuesday’s Morning Briefing

Tuesday’s Morning Briefing

S&P futures have sold-off modestly in the overnight session, pulling back from yesterday’s high at 2115 and traded down to 2107, as of this post.

On Monday, the S&P sold below Friday’s close and re-tested support at 2100. The market spent very little time at the low. S&P futures auctioned up to 2112, pulled back to 2107, before trading above what has been minor resistance at 2112 and auctioning up to 2115.

The major U.S. Indexes closed above the prior day’s close. The NASDAQ Composite rallied up to 5008: +44 points (0.90%). The DOW closed at 18288: +155 points (0.86%) and the broad benchmark S&P 500 finished the session at 2117: +12 points (061%).

The initial pull back to the prior high at 2100 was therefore meet with a buy response. On the NYSE advancing issues (4028) outnumbered declining issues (2728): 57% to 38%. However, despite the attempt to re-test the current all-time record high, there was no buying interest above 2118-2120.

Thus, as of yesterday’s close, the S&P 500 remains range bound between the previous high at 2100 and the new all-time high at 2120. How much longer the broad benchmark S&P 500 will languish at the high remains to be seen.  

What is obvious is that fundamental data indicates that the U.S. economy continues to underperform. The Institute for Supply Management (ISM) said U.S. manufacturing growth fell in February to its slowest in 13 months. 

The Index of national factory activity fell to 52.9 from 53.5 the month before. Most components of the index declined, suggesting a slowing in growth in the manufacturing sector.

At present the previous high at 2098-2100 remains near term support.

The prior daily range pull-back level at 2084-2080 is key support.

Below the lower edge of the current trade cluster there is additional support at 2036 and 2020.

Near term resistance is located at the current all-time high 2120-2118.

02-MAR-2015 | Monday's Morning Briefing

S&P futures traded modestly lower in the overnight session, pulling back to re-test support at or near the prior high at 2100. On Friday the Major U.S. benchmark indexes closed lower.

Since auctioning up to the current all-time record high at 2118-2120, S&P futures pulled back the distance of an average daily for the first time , trading down to 2101 late in the day, before auctioning up modestly to 2106 at Friday’s close.

On 02-18-15 S&P futures rallied up to 2100, before selling off from the high and pulling back to 2082.  In the context of a break-out above 2100 and the subsequence rally up to the new all-time high at 2118, the re-test of the prior high (2100-2098) is an important event in determining the potential for continue of the underlying market sentiment.

We noted in Sunday’s market commentary that we expect to see the S&P re-test Friday low 2101, the prior high at 2100-2098 before attempting to re-test the all-time high at 2118-2020.

A breach of support at the prior high would mark a change in sentiment, indicating that the rally up to 2118-2120 market the exhaustion point to the current rally.

As we had noted during the week, there was continued lack of buying interest at the high. After trading up at or near our maximum likelihood expectation estimate at 2120-2118, the rally stalled. There was no buying interest above 2112 after that. For this reason the normal average daily range discount (pull-back) may not be sufficient to attract new buyers.

The likelihood that Friday’s pull-back (relative discount) may not be sufficient to attract new buyers is further complicated by the “timing” of the pull-back: occurring late in the day, as opposed to early in the session. 

  

The previous high at 2098-2100 is now near term support. The prior daily range pull-back level at 2084-2080 is key support. Below the lower edge of the current trade cluster there is additional support at 2036 and 2020.

Minor resistance is located at 2112. Near term resistance is located at the current all-time high 2120-2118.

01-MAR-2015 | Sunday's Market Update

The Major U.S. benchmark indexes closed lower on Friday. The Dow ended the session at 18132: down -81 points (0.45%). The Nasdaq Composite close at 4963: down -24 points (0.49%). The broad benchmark S&P 500 finished the session at 2104: down -6 points (0.30%).

On the NYSE declining issues (3687) outnumbered advancing issues (3028): 52% to 44%. 

S&P futures pulled back 17 points below the current all-time record high at 2118, trading down to 2101 late in the day, before auctioning up modestly to 2106 atFriday’s close.  On 02-18-15 S&P futures rallied up to 2100, before selling off from the high and pulling back to 2082.  Since the 02-20-15 pull-back S&P futures have rallied 36 points up to the current all-time record high at 2118.

In the context of a break-out and a new all-time high, the re-test of the prior high (2100-2098) is an important event in determining the potential for continue of the underlying sentiment.

 In simple terms, all market participants are aware that the S&P has broken out above it previous high and has rallied up to a new all-time record high. Hence, the expectation is that the buying interest that initialed the rally will set in and provide support on the initial pull-back. The idea is that market participants will be looking for the S&P to re-test the current record high and possibly go on to make a higher high.

If there is no buying interest and the initial pullback the likelihood is that the original initiating buying interest was misinformed, that potential all those who “thought” the S&P would trade higher have already bought. The lack of buying (support) on the pull-back indicates the last buyer (at that price level) has already allocated their funds. This increases the likelihood of a more substantive selling off.

We have been reminding our readers that it was just one month ago that the S&P was trading at 1970. The cause behind the current rally is unclear. Certainly, there is no fundamental catalyst supporting the rally.

The "decoupling" of the markets direction and US underlying economy continued this week with 38 key economic data falling below expectation  and only 6 coming in above expectation; marking the worst economic performance in 12 months. February was the first month in which we showed that as a result of plunging revenue and EPS guidance and deteriorating sales and profitability, 2015 will be the first year since Lehman when there will be a full year decline in year-over-year sales.

However, corporate "buyback” announcements have surged with February ($98bn) posting the largest monthly tally on record. Perhaps the lack of gains in other traditional assets class has forced “capital” seeking gains into equities. Looking at the underlying fundamentals, buybacks and the lingering QE (zero interest rate) is the only rationale that can explain the current rally.

Regardless of the “underlying cause” markets are moved by buying interest and selling pressure. In the context of the current rally in the S&P, Friday’s late in the day sell-off was a part of what we would call normal market development.

As we had noted during the week, there was continued lack of buying interest at the high. After trading up at or near our maximum likelihood expectation estimate at 2120-2118, the rally stalled. There was no buying interest above 2112 after that. For this reason the normal average daily range discount (pull-back) may not be sufficient to attract new buyers.

The likelihood that Friday’s pull-back (relative discount) may not be sufficient to attract new buyers is further complicated by the “timing” of the pull-back.  

For example, if during the overnight session, a market trades below the prior day’s close and at the open price auctions back up to “fill the gap”, what information does the overnight sell-off event and the reaction to, tell us about the market sentiment?

If, after auctioning back to the prior day’s close, there is no re-test of the previous day’s high, what information does the overnight sell-off event and the reaction to, tell us about the market sentiment?

If, after trading in a narrow range at the prior day’s close, the market sells off at the end of the day: what information does the overnight sell-off event and the reaction to, tell us about the market sentiment?

Now considers the situation in reverse.

The market sell-off below the prior day’s close during the overnight session.  At the Open, the price trades down to re-test the overnight low. There is no selling below the overnight low.

The market auctions up and “fills the gap”. Following the filling or the gap, the market goes on to re-test the prior day’s high.

If price closes in the middle of the trading range; what information does the event tell us about the market sentiment?

If price closes at the high of the trading range; what information does the event tell us about the market sentiment?

Bayesian logic would “infer” that a lower low in the overnight session, as failure to auction back to the prior high, followed by a sell-off into the close implies a lack of buying interest and dominant selling pressure through the range.

If the selling pressure at the low is not addressed; i.e. re-test of the low, now lower low the only offsetting factor (event) would be a re-test of the high and a higher high, close at the high.  In that case the market development, price stricture would indicate strong buying interest.

Based on Bayesian logic Friday’s price action suggest there increased likelihood of a re-test of the low and the potential for a lower low.

The previous high at 2098-2100 is now near term support. The prior daily range pull-back level at 2084-2080 is key support. Below the lower edge of the current trade cluster there is additional support at 2036 and 2020.

Minor resistance is located at 2112. Near term resistance is located at the current all-time high 2120-2118.

Friday’s Morning Briefing | 27-FEB-2015

Friday’s Morning Briefing

After auctioning up to 2118 during Wednesday’s session, S&P futures pulled back the distance of an average daily range (17-23 points) on Thursday trading down to 2101.

The last time the S&P pulled back the distance of an average daily range was on 02-20-15, when the S&P traded down to 2082. Follow the 02-20-15 pull-back the broad benchmark indexes went on to rally 36 point, up to the current all-time record high at 2118.

Astute market observers are aware that pull-back and retracement are part of what is called normal market development. According to the CBOT, auction markets function of on a dual mechanism consisting of buying interest and selling pressure which is a part of price discovery.

In other words a market will rally until there is no more buying interest and or buyers feeling “price” has auctioned to high. Similarly, a market will sell off until there is no more selling pressure, and or selling feeling “price” has auctioned to low.

In an ascending market a pull-back is an opportunity to buy at a relative discount to the current high.

The distance of an average daily range provides a statistical reference by which a relative discount can be inferred.

Apart from the range measurement itself, is the pattern or sequence of the pull-back in the auction context. In other words, the time of the pull-back and retracement provide information (feedback) regarding the “condition” (state) of the auction.

A pull-back early in the session, followed by a re-test of the high is an indication of strong buying interest. A pull-back late in the session that fails to re-test the high is an indication that buying interest is waning.

Yesterday’s pull-back came late in the day. There was insufficient buying interest to auction the S&P above its previous day’s close.

While support held at or near the previous high 2100-2098 there was on buying interest in the overnight session, willing to auction S&P futures above 2110-2112.

The lack of buying interest above the 2110-2012 price level does not yet indicate the rally had run its course and a more substantial pull-back is likely.

However, we would remind our readers that on 02-02-15 the S&P futures traded at 1970. The S&P is up 138 points (6.8%) above the February low. 

Coming into Thursday’s session we noted that the current 33.50 point rally is due for a pull-back.

The previous high at 2098-2100 is now near term support.

The prior daily range pull-back level at 2084-2080 is key support. Below the lower edge of the current trade cluster there is additional support at 2036 and 2020.



Billy 

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