Shallow Thoughts

The Fed has cut back on its outright Treasury purchases. But the Treasury is still pounding away at the market, flooding it with enormous amounts of new supply day after day.

This should be bearish, but so far it hasn’t been. Maybe that’s because the Fed pumped in so much extra cash in the first place and now just wants to take some back to skim off some of the froth.

Hourly ES S&P 500 Futures Chart

The S&P ES futures are down about 6 points at 2730, at 7:15 AM in New York, 1:15 PM in most of Europe.

Yesterday we recognized that if the ES cleared 2690, it should be good for another run at 2730-40. And if that’s cleared, we saw that the target would be 2875.

So they peaked above 2740, but the air got a little rare, and the Europeans got a little gunshy. The New York syndicate is just sitting down at their screens now, in their pajamas, no less, and the question is what they’ll do.

The Fed has sent a signal that it’s not going to be as generous in the days ahead (see Shallow Thoughts above). Trust me, the New York gang knows this.

So how close to the edge do they want to come? My guess is, “Not very close.” But we’ll make a judgment based on the market signal, not based on my gut feelings.

I believe that signal will be what happens around the line at 2730. If they fall below that, the S&P should lose 60 points in a hurry. 2665-70 would be the next crucial support level. At that point, it would again be a wait and see the situation. But there’s a very good chance that if the market does start down early in the day, it will follow through to the bottom of this week’s range, to around 2625.

On the off chance that they hold it together here around 2725-30, then they take a run at the high of 2768 again, but this possibility seems to be slipping away right now as I write.

Hourly indicators tuned to a 5 day cycle frequency have turned lower, with a 3 day cycle low ideally due late today. But a 5 day cycle low isn’t due until Monday or Tuesday.

Sell Easter and Passover, buy the Fourth of July?

S&P Futures Daily Chart 

The daily chart gives a broader perspective. The futures have been traded between 2717 and 2768 overnight and in the pre market.

On Wednesday, the ES has broken out of a range with a measured move target of 2825-50. The next resistance level is 2860. The 50% fibo retracement level of the crash is 2785. But now the breakout has stalled, and the market has pulled back to the top of the base pattern.

This is normal in a bullish context. Even a little dip into the pattern would be normal. But if that continues, it raises the prospect of a failed breakout. They tend to be extremely bearish.

Where might that be? I’d guess that a drop below yesterday’s low of 2620.75 would qualify. But if they hold at 2710 or better, it’s still green light. Between there and 2620, it’s yellow.

Rate of Change and MACD tuned to an 8 week cycle remain bullish, despite the pullback in RoC. So the benefit of the doubt still goes to the bools here.  

S&P Cash Index Hourly Chart 

The red bar at the far right shows where the futures traded overnight. It’s between 2717 and 2768. Resistance is indicated at 2775-85. Support is probably around 2665.

An hourly bar that ends below 2725 in the early going would break the 3 day uptrend. That line rises to 2790 in the closing hour. If that breaks, then the initial target would be around 2685

The 5 day cycle oscillator has been on the sell side since Tuesday. It’s out of synch. I’d give greatest weight to the price action relative to the 3 day trendline.