GAME CHANGER: S&P DOWN 4 OUT OF LAST 5 DAYS

By Danny Riley
There is a lot to talk about. Two weeks ago the ESZ closed up 5 days in a row. Last week the S&P closed down 4 out of 5 trading days, with Friday capping off the week with the worst daily loss since June. The S&P closed down 1.66% while the VIX closed up 13.50%. The markets logged one of their worst days in four months, highlighted by the global slowdown and a batch of disappointing earnings results.

The 25-year anniversary of Black Monday gave everyone a scare Friday with the NASDAQ  futures (NQZ) down 68.75 points and the S&P futures (ESZ) down over 27.6 handles. Over the past month the institutional trade has been zeroing in on a big liquidation trade with the big mutual and investment funds selling NASDAQ/buying Dow and S&P. With the NASDAQ cash up over 20% only a few weeks ago, many of the big  investment/mutual funds have been taking profits. Part of the selling has been tied to the uncertainty surrounding the presidential election and the fiscal cliff.

While the S&P futures (ESZ) was down sharply, it still closed 4 handles above last Friday’s 1420 low and down 48 handles off its most recent contract high. In contrast, on Friday, Oct. 12, the NQZ made a high at 2728.25 and settled at 2710. Last Friday the NQZs made a higher high at 2737.50 and a lower low at 2664. So the net of all this is that the S&P is down 44 handles from its 1468 high and 42 from its 1466 double top. The NQZ is down 64.24 points from the week before (Friday, Oct. 12) and down 73.5 points from last Friday’s high, or off 46 points from Friday to Friday.

Stops and the 1420 retest: Last time down to 1420 the ESZ failed to take out the sell stops. The ESZ did trade down to 1416.50 on Globex, but on Monday, Oct. 15, the ESZ opened at 1426, made a low at 1422 and never traded back down to the level until late last Friday. The question now is how serious can this get?  The NASDAQ was down over 2% and volume was heavy, more than 20% higher than the past several weeks. Down volume was almost 89% on the NYSE and 85% on the NASDAQ. According to Lowry’s it was a 9-to-1 down volume day on the NYSE. All month long many of the market timers were calling for some type of letdown. There are still 8 trading days left in a month that historically is not known for closing well, and there could be more profit-taking as we go into the end of the month. The markets have a lot to think about going into the election and the end of 2012. …

Our view:
Smart money is taking some profits.

• It’s 6:00 a.m. and the ESZ is up 5.75 handles at 1429.75, crude is up 60 cents at 91.04 and the EC is trading 1.3071, up 41 ticks.
• In Asia 6 out of 11 markets closed lower (Shanghai Comp. +0.21%, Hang Seng +0.68%)
• In Europe 9 out of 12 markets are trading modestly higher (CAC +0.26%, DAX +0.01%)
• Today’s headline: “S&P Futures Rise, Euro Gains As Yen Falls on Exports”
• Economic calendar: MONDAY: Final presidential debate; earnings from Caterpillar, Freeport McMoran, Hasbro, Peabody Energy, Texas Instruments, Yahoo. TUESDAY: Richmond Fed manufacturing index, 2-yr note auction, FOMC meeting begins, Apple event; earnings from DuPont, 3M, United Technologies, UPS, Coach, Xerox, Amgen, Facebook, Netflix, Gilead Sciences. WEDNESDAY: Weekly mortgage apps, new home sales, FHFA home price index, oil inventories, 5-yr note auction, FOMC mtg announcement; earnings from AT&T, Boeing, Bristol-Myers, Delta, Eli Lilly, Akamai, Symantec, Zynga. THURSDAY: Durable goods orders, jobless claims, Chicago Fed nat’l activity index, pending home sales, Kansas City Fed survey; earnings from Altria, AstraZeneca, ConocoPhillips, P&G, Aetna, AutoNation, Credit Suisse, Dow Chemical, Pulte, Sprint, United Continental, Apple, Amazon.com, Coinstar. FRIDAY: GDP, consumer sentiment, Windows 8 released; earnings from Comcast, Merck.

• FAIR VALUE: S&P +1.00, NASDAQ +9.00
• YTD NET CHANGES: DOW +9.22%, NASDAQ +15.37%, S&P 500 +13.96%, RUSSELL +10.81%, VIX -27.52%.

Brian’s Friday recap: All the old-timers were out sharing their memories and close encounters with the other side on the 25th anniversary of the 1987 crash. I retweeted this in the premarket, Nostalgia is like a grammar lesson: you find the present tense and the past perfect… At that time, GE had just announced and traders as well as investors began to connect the dots as one 3rd QTR disappointment led to another, then even more as the marquee names began to join in kind. As we know, the techs have been bleeding a slow death as some are reporting the death of the PC and chatter in the halls about the DJT’s failing to confirm the new highs – Dow Theory indicating the rally’s uncertainty to the old school. No matter what the reasons, um QE 3 – the indices were playing catch-up with the tape today – of all days. Coincidence? You tell me. Either way, this move should make for a fun presidential debate Monday night. Tick tock…..

Morning observations: Elway posted, the difference today vs. so many other times since 1987 people are not that excited about the downside at least in terms of today’s volume. In past times, when we have bad technicals you have had so many idiots who thought ” i am going to get to retrade 87 crash” thankfully most of those muppets are gone and machines have replaced most of em. so maybe we can have a bit more fun but nothing more than another 2% – looking forward to Monday. As of this morning, 3rd QTR earnings revenue – Beats: 41%; Misses 59%

Thursday started with 245k ESZ and 900 SPZ traded on Globex, trading range 1447.40 – 1453.20 / Thursday’s RTH’s, pit range was 1447.70 – 1459.50, settled at 1451.50 down 5.6 handles.
Today’s RTH’s two handles lower at 1450.00 to 1449.00 marking the high before the mornings (seasons) dismal earnings reports / warning sank the futures. After briefly holding the retest of the globex/thurs RTH’s low, sell stops and programs lead the index to test 1433 area followed by some sideways trade. By 9:25CT 1446 area held and a new low of 1442.30 traded. After some brief sideways trade the futures stepp lower, sometimes quick drops and at other times stepping lower. The volume was above average, but not heavy – considering the price action and remember with everything getting hit today, Monday may be some follow-through selling for margins and certainly, the old timers will be chatting up the nostalgia again on Monday. After trading the 1423.50 low the spoos traded sides and did try a late rally, but the sellers were waiting in that 1431 pivotal area we call one of the Bens, in reference to Ben Bernanke and the price action. The closing imbalance showed the broader market with a $700M to the buy side. The cash close traded 1426.50 area before settling at 1424.00 down 27.5 handles on the day, while the nazzy was down almost 69 handles and the DJT’s were down 74 points at 5082.

CONTRIBUTORS’ CORNER

SPX CHARTS

Roger Volz, BGC Charts

Comments from 8:22 to 8:43 IB posts this am….Earnings not helping the bulls so far – leaves 1461-64 ledge and double top intact; Nasdaq Composite and NDX are deepest in negative divergence; EU yields complete down cycle with retest March/April lows (going back up?)….Oct expirations

SP1 down channel forming lower highs lower lows; sees first momentum loss < 1453; continuation < 1441.25 to expose air pocket; important names going lower and market holding – expiration related? Maybe or maybe not butTrade for the day: Short the 9:30am opening print/Buy SPY puts (rotation allowing it to outperform QQQ/IWM)=> Inside Range1441 / 1453; Outside Range 1427.50 / 1461.50

ND1 negative divergence maintained following underside retest neckline of H/S pattern => Inside Range 2722 / 2753, Outside Range 2705 / 2783

Russell 2000 lower highs left standing with early momentum < 832.00 ; sub 826 for technical downgrade => Inside Range 826 / 832, Outside Range 811 / 846

VIX choppy pattern akin to April-July 2011 =>Inside Range 13.90 / 16.45,Outside Range 13.50 / 18.00

Gold risk off retest lows; sub 1733 opens risk to 1718; daily charts in defensive pattern with ST SMA rollover => Inside Range 1718 / 1783, Outside Range 1718 / 1783

CL1…..higher lows left inverted h/s intact; still need to confirm > 93.60…..inisde range 92.60 / 90.55…..outside range 93.60-88.55

Silver….higher low attempt busted testing bottom neutral top negative technical range 32.08…risk to 31 on failure

Shanghai …awaiting close > 2150 for next short term technical reversal for initial sign of positive divergence

Copper retest bottom neutral 364.80 after stalling below repair line at 376.60

DJIA pattern lower high / lower low developing…..inside range 13650/ 13480 …..outside range 13780 / 13300

DJTA…..lower high against a test against the first daily chart’s technical repair line 5195….inside range 5240 / 5090….outside range 5320 / 4990

DJUA upside reversal consolidation continuation pattern > 483.50 gets safe haven buying…..inside range lifted 491.50 / 480.50….outside range 499.80 / 474.00

Inside Range

· Represents intra-day momentum gain/loss

· For example, if the upper bound of the Inside Range is 1453, one can trade short against it/use this area as a stop and vice-versa

· If level is broken (sustained 5 minute move at a minimum, not quick spike up/down), it then typically becomes support/resistance for the remainder of the day

Outside Range

· Represents short-term trend changes

· If broken, the current trend may be in the process of reversing

· 2nd Outside Range (applied if needed) may be in play for a true trend reversal

SP 500 Futures 15 Min Chart and Indicator …aggressive sell programs running stops below 1445.00 and again below 1440.50 begins to find footing against a consolidation range from 10/16 at 1436.00 – 1435.60 ….. OS readings began to be issued below 1440.75 with deeper readings issued below 1438.50 / 1436.50 …… the first level at 1440.75 now becomes initial resistance to begin to repair

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