E-mini trading advisory for Oct. 16

Markets melt down in their worst session since 1987 market crash, all this on disappointing retail sales that point to recession. Bernanke: credit crunch will get resolved, but economy will show its pain as recovery will take time.

ECONOMIC DATA

8:30 AM CPI

8:30 AM Core CPI

8:30 AM Initial Claims

9:00 AM Net Foreign Purchases

9:15 AM Capacity Utilization

9:15 AM Industrial Production

10:00 AM Philadelphia Fed

YESTERDAY’S MARKETS

Stocks suffered their second largest point drop ever. The E-mini SP opened the session at 980.00 and never looked back. After testing the 963.00 area the indexes bounced on any new low on small short covering rallies. While the 950.00 are held as strong support during three consecutive tests, the SP was not able to get back above the 963.00 key levels. As the index failed to recovery, yesterday’s late trapped longs and new sellers pushed the markets lower to 926.50 on the SP from where a strong short covering rally pushed the index back up strongly reaching 948.75. As the last hour of the session kicked off, the indexes just melted down into the last minute of trading. For the day, the SP lost 99.00 points and settled at 903.25, the Nasdaq lost 137.00 points ending the session at 1229.00 and the Russell plunged by 61.50 points finishing the day at 496.70. The Dow lost 733 points and closed the day at 8,577.

MARKET COMMENTARY AND OUTLOOK

Yesterday I wrote: “Yesterday’s failure to continue higher with the previous day great momentum, as consequence of the lack of volume seen on the rally, and the bearish divergence that the Nasdaq showed since the beginning of the session have to be considered normal, a consolidation day on the SP and Dow of the historic rally. However the weakness on the Nasdaq which at some moment showed a 50% retracement of the previous day gains is a red light for the bulls. I have mentioned many times the importance of the “next day”, and yesterday, the index failed to show the follow through that I was expecting that place in jeopardy the recent rally. Yesterday’s wild swings are normal after the last run and they should continue.

The way the Nasdaq sold off since the beginning of the session has traders confused about the near term market direction, is not that the other indexes were able to continue with their upside move, but they did hold nicely during the session and they came back from important technical levels, the Dow respected the 9000 are and the SP was able to close above the 981.00 level. So yesterday’s lows will have to hold or the rally that we saw during Monday’s session could be only a bear rally and the indexes will move lower to test or break the recent lows. On the other side we have to consider yesterday’s pullback as normal, after a huge rally of more than 200 points on the SP, yesterday’s move consolidated in a surprisingly strong way the recent gains, no matter if all the early run gave way to a loss. If we see the daily charts, the SP and Down have formed a large triangle pattern, that has the potential of a 180 point move, this formation will have to get defined during the next few sessions, or to continue to be formed until the breakout occurs, if the SP will trade below 963.00 we can assume that another test of the lows will be seen, but if the breakout occurs above the 1055.00 area more upside will be seen bringing longs in and the test of the recent lows will only happen in the medium term. Regardless of the nightly session in which the SP and Dow are trading lower, I still believe that the rally should be able to continue before markets turn lower for a test of last week lows, so I would carefully watch my support and pivot levels and the Nasdaq behavior in order to try and get long the markets, however if yesterday’s lows get broken or the Dow trades below 9000 I will avoid the long side.”

As we expected, once the key support areas at 963.00 on the SP and 9000 on the Dow failed to hold, the collapse was total. The SP has given up 167.00 points since last Tuesday Globex high. Yesterdays late sell off and its close on the daily lows, below fair value, could indicate a temporal capitulation and the exhausting move of the historic rally seen during Monday’s session, however it has placed also the indexes on a position where a crash looks possible. Is that what will finally result in a multi monthly consolidation with intraday ranges returning to normality? Will the Dow Jones get to 7000 points as the SP test the 740.00-720.00 area? Certainly we don’t know. The 23.6% Fibonacci retracement from last week lows to Tuesday’s regular trading session highs crosses at 888.00, if that level won’t hold, then the crash scenario will be only avoided by a higher low, a successful test of the lows, or a marginal new low that gets immediately reversed.

The economy is in real problems, and the market is anticipating a painfully recession, all the economic data points for a weak economy and higher unemployment.

So no matter where the opening is, the markets will have to rally immediately or every remaining buyer will just disappear. All the technical levels have been crushed and it seems that finally the market will respond to the economic data, until economic reports start to show an improvement of the economy, the markets should keep falling. However, if the SP and Dow managed to post higher lows, around 850.00 on the SP, and 8000 on the Dow, and hold, then another wild rally could be seen. Volumes were high yesterday, many fund liquidations but not new participants, no new longs or shorts, professional traders are on the sidelines waiting for better conditions to get involved. We’ll get a bunch of data today, so the markets will continue to show this wildness as they react to each piece of information.

I don’t have to repeat that only if you have big pockets you should try to trade this markets, the situation is very risky and rational stops get reached before you are able to place your orders in, so be very careful.

TODAY’S SESSION

For today’s trading roadmap and intraday updates, please read the authors bio.

TODAY’S SUPPORT, PIVOT AND RESISTANCE LEVELS

S&P

NASDAQ

RUSSELL

Resistance 4

964.00-965.00

1318.00-1320.00

536.50-537.50

Resistance 3

935.50-936.50

1273.00-1275.00

516.30-518.00

Resistance 2

923.50-925.50

1258.00-1260.00

510.70-512.00

Resistance 1

913.00-915.00

1243.00-1245.00

503.00-504.50

PIVOT

936.00

1283.00

516.10

Support 1

891.00-889.00

1214.00-1212.00

490.00-488.40

Support 2

880.00-878.50

1199.00-1198.00

482.20-481.00

Support 3

868.50-867.00

1185.00-1183.00

474.00-472.80

Support 4

842.00-840.00

1140.00-1138.00

456.90-455.00

S&P

NASDAQ

RUSSELL

FIBONACCI

FIBONACCI

FIBONACCI

1188.50

1540.51

679.14

1162.25

1518.74

662.06

1119.75

1483.50

634.40

1077.25

1448.26

606.74

1051.00

1426.49

589.66

1008.50

1391.25

562.00

966.00

1356.01

534.34

952.88

1345.13

525.80

939.75

1334.24

517.26

897.25

1299.00

489.60

854.75

1263.76

461.94

828.50

1241.99

444.86

786.00

1206.75

417.20

743.50

1171.51

389.54

717.25

1149.74

372.46

DAILY PROJECTIONS

S&P

NASDAQ

RUSSELL

AS DAILY HIGH

955.00

1310.00

529.50

AS DAILY LOW

844.00

1147.00

457.00

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