Gap and Fade Slides the Market

Pre-market futures are up over 1% at the time of this post entry. The Employment Report came out roughly in-line with expectations, which has given the market a chance to pause and catch its breath from all the recent selling.

The Non-farm Payrolls number was -651k vs. -650k expected, which is doing exactly what I speculated an in-line number would do, give the market some wiggle in its step. The interesting thing is that traders are largely ignoring the miss in the Unemployment Rate, which came out at 8.1% vs. 7.9% expected, the highest rate in 25 years. You can see that the combination of Bulls and Shorts are focused mainly on the "headline" Non-farm Payroll number (probably because that's the number that was brought in to focus with the ADP Report and the Weekly Jobless Claims the past two days). I speculate that the 8.1% Unemployment Rate will eventually pick up some headlines and press throughout the day and over the weekend, which will take a little foam off the top of the excitement for the Bulls later in the day or next week.

For now, at the open, the Shorts/Bulls are gapping the market up, which will probably give the market a Pauser Day at worst, or a potential short term Bowling Ball Bounce at best. The market has had a tendency to gap up and fade quite a bit lately, so it will be important that the gap hold any type of test early in the day in order for traders to gain confidence that an "oversold" technical bounce is forming.

Here is a chart of the SPX:
(click on image to enlarge)

Here is a chart of the Dow:
(click on image to enlarge)

The first resistance area for the Dow will probably be the 6,700 - 6,725 area. A move above that area would strengthen the technical bounce, especially if the market can close above 6,750. The same area of resistance for the SPX will probably be 692 - 695, with a technical bounce signal on a close at 700 or above. If the morning gaps fail early in the day then the Dow could still try to drop and tag 6,500 again (the Dow got close to that number yesterday with a low of 6,544). The worst case scenario for the Bulls is a soft intra-day uptrend in to the 6,700 - 6,725 area that fades back down through the gap late in the day.

Even if the market sustains a rally throughout the day, watch for some late day selling as at least a few traders unwind some more positions ahead of the weekend. The risk of a news bogey (especially after yesterday) is constantly on traders minds.

Be very cautious and very selective with any calls today. Even though the market is catching a tailwind this morning, the charts and the mood are still very sour. As I stated above, there have been a lot of gap and fades recently, so keep a tight leash on any bullish strategies, and keep any bullish positions fairly small for now. The market will carry some gap and fade risk today, as well as late day fade risk on weekend selling. I expect some gap and fade right out of the gate, so I want to see how this constructs itself before I get too excited about calls. That means any calls today should be quick and sharp, with no messing around and no hand wringing over whether or not you maximized some kind of "bottom-picking" trade. Just let all that stuff go and enjoy being nimble.

12:55 pm MT: Intra-day Update: The market gapped, popped, and faded because the trading elves out there still don't think the market is quite crispy enough. There still busy burning the Rice Crispy treats.....The gap and fade is not all that surprising, I speculated that the market still carried a lot of gap and fade risk this morning.

Here is a current 30m chart of the Dow. You can see that traders continue to fade the market, and now the Dow is at risk for the full 61.8% Fibonacci retracement of the 27-year Bull Market down to the 6,000 area:
(click on image to enlarge)

Here is a current 5m chart of the DIA. You can see the early day gap and fade that is continuing to slide the market:
(click on image to enlarge)

About the only thing the market has going for it into the weekend is short covering, and even the Shorts are not exactly motivated to do a whole lot of covering these days. However, if you are in puts, now is a good time to start scaling out in case we get a last hour short-covering bump. Keep a little there for a bit, but the first signs of short-covering and you might as well exit the last of your puts.

1:35 pm MT: Intra-day Update: There's the short covering bump that I was looking for. We'll see if the market fades it or if this whole price area basically sustains into the close.

Here is a current 5m chart of the DIA showing the short-covering bump:
(click on image to enlarge)

Volume picked up on the bump, so the Shorts may have a little more in them before the close, but I don't expect anything hyper from either the Bulls or the Bears for the rest of the day. This looks like the general settling out area for the day.

1:43 pm MT: Intra-day Update: The Shorts did have a little more in them, which is giving the bump a little more push. If you scaled out of any puts, and then locked the last of them on the start of this bump. You save yourself over 100 points on the Dow in less than 15m.

Today may go down as a Long-legged Doji, which is part Pauser Day and part Slider Day.