Last week started with the markets wrestling with upper time and price resistance levels. They could have elected longer term targets mentioned here and in the email column. The S&P 500 actually came to within 3¢ of last Friday's high late Monday (1540.56-1540.53) to create a double top. Tech did not confirm this action and down we went. Obviously, longer-term targets will wait for another day.
Before we dropped, the NQ was still testing upper resistance in the form of Tuesday's gap down. By the end of the day, the NQ filled this gap near the high but was up against a time window on the hourly scale. As I have mentioned in recent updates the NQ retested its March 5 low on the 14th, but did not break it. There was a 67-hour lag between those two pivots. The pivot low came in on May 24 on the 521 (Lucas) hour window from the actual March 5 bottom but on Tuesday's close was sitting at the 521-hour time window with the March 14 secondary low. This price and time cluster of Tuesday's resistance line were enough to sink all of the charts on Wednesday morning. Remember, it’s the NQ that leads. Market precision is fascinating. You can see from this sequence the mass mind does have a memory. One 521-hour Lucas window turned the markets up, the next one turned the markets back down. The media will create reasons for the turn such as statements from Federal Reserve Chief Ben S. Bernanke, but they cannot have it both ways. Tuesday's action was V shaped. If the Fed chief's comments turned the markets down, what turned them back up? Here we stick with Universal calculations and support/resistance zones as the underlying structure of the markets. That is the backdrop to the new leg.
By late Thursday, the drop created enough fear in the p/c to either set up a washout or a relief bounce. By Thursday night's close the Dow was down for 34 hours as were some other indices. The NQ was already down 44 hours as well as 147 15-minute bars, which meant that by the middle of Friday's session, the futures day session was to be in the 47 (Lucas) hour window as well as the 161 15-minute bar cycle. We hypothesized on Thursday night this window could produce a significant high or low. I was either looking for a total washout on this time window or a failure in the middle of Friday's session. In a weaker market, the high probability outcome on a bounce would be markets electing the first chance they had to drop. They did not.
While I was looking for a washout, which did not happen, here is what did materialize. The NQ did have what is known as a wash and rinse, which is a small degree washout. Friday's opening was four points lower which satisfied our minimum requirement for a low by continuing Thursday’s emotional sell. It bounced but then made a retest of the low which missed by three ticks. At that point, the hourly bar put in a morning star pattern and we were higher the rest of the day. There were three opportunities to fail after we turned back up. First, as we mentioned, the bounce bypassed the 47 hour/161-15-minute cluster in the middle of the day. Next, it took out Thursday's fourth wave high at 2:15 CST, which also was the 38% retracement of the drop for the whole week. Once again, a weaker market would likely have failed at Thursday's last pivot high and would have done so near the time window. This is certainly new information to consider.
Once again, lower price targets were not hit and it is entirely possible the correction can already be over. Coming into the week the one thing we know is the markets have passed on the first important fork in the road where conditions were set up for a failure. This information implies two likely scenarios coming into the week. First of all, it now has the opportunity to fail at the next set of upper resistance levels or we are going higher still. A third scenario is a potential larger degree sideways consolidation but it has not developed yet and we will cover that possibility if it materializes.
One thing that might be significant was the behavior the E-mini markets on one of Friday's intraday pauses after the low. We had hit a pivot high around 9:30 CST. After the initial couple of bars off the high, had you chosen to go short the Dow E-mini was about 28 points off its high (risk at $5 a point=$140 per contract) against an NQ that was only down about 4.5 points ($20 per point=$90 per contract). Usually, these two are in sync. When the Dow E-mini drops 20 points ($100) the NQ will usually be down five ($100). Obviously, tech was trying to lead and by the end of the session, the NDX had retraced nearly 50% of the drop while the S&P 500 and Dow had only retraced back 38%. That is a bullish sign.
Coming into the new week, we have the potential for tech to continue to lead to the upside. At this stage, many intermediate term players should be locking in profits no further than the 38% retracement of the move from the March 14 low to the high. In tech, short to intermediate term support has not been violated yet but it has in the Dow in the form of the May 24 low. Tech is leading here which opens the possibility of another bifurcated market where the Dow lags. But if Friday is any indication, we should look for a retest of upper resistance levels in the least. There is strong resistance near the highs so we will have to evaluate later in the week in the evening updates to see what materializes.
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