Traders Hang Around For Earnings Season

Pre-market futures are down ahead of the open on "concerns" more than on any news. The reality of the recovery (or lack of it) is sinking in a little more this morning with traders, possibly because AA is kicking off earnings season tomorrow and the Googley-Eyes may be starting to fear what earnings season will do to their portfolios. AA is the early bird, the big slew of earnings don't hit until next week, so traders may also be concerned about earnings warning season this week. Typically, earnings warning season comes the month prior to earnings season, but the past few years companies have waited until the beginning of the earnings month to warn, if they have something to warn.

The only noteworthy news this morning is that IBM broke of negotiations with SUN to purchase the Java giant (I've always wanted to type Java giant, it could be the name of a juice or something).

I noticed a number of analysts and fund managers were quoted this morning stating things like this: "Concern about the condition of the financial system will be here for a while, at least for the rest of the year." "While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class." "Banks will be responsible for all of the 76% rebound (in the stock market) in the final three months of the year, because without the financial companies, the stock market would actually decline 4.5% (according to some "data" and analysts)." "The reliance on bank stocks (to push the stock market rally) is making fund managers increasingly concerned that the 25% gain on the SPX since March 9 will dissipate." (The rally was the steepest since 1938)." People should not get carried away." (Are you kidding me? These are the Googley-Eyes were talking about here, logic does not enter into the equation). "Unemployment may hit 9.4% this year (currently at 8.5%)." And finally, "I would be careful about chasing this rally."

I tossed all those quotes on here, not because it's new news, but because traders have sucked up so many tiny drops off the bottom of the glass (25% rally in the stock market in less than a month) that the news is being made to fit the mini-paradigm shift that is being anticipated. In other words, a lot of fund managers, analysts, and news services think the steep uptrend is about to run out of gas, so the news that was already out there during the rally is now being brought to the forefront so the news services won't look like they dropped the ball on a roll-over. While I agree with the news, I won't call the trend over until it's actually over, and it's not over yet. Today will probably be the start of the fourth pullback in the trend. But the SPX will have to drop to 775 in order for the uptrend to actually be over.

The SPX is set to open down about 8-10 points as traders ponder the future of the steep, frenetic uptrend and the lack of sustainable fundamentals behind the move.

7:42 am MT: The SPY is testing the gap (82.70 - 83.00 area). A drop through the top of the gap opens the door for a move to the bottom of the gap in the 81.00 area. If enough Googley-Eyes are still hanging around, the SPY (market) could go test the highs around 84.50, but the odds are a little higher for a continued pullback today.

Here is a chart of the SPY showing the gap test:
(click on image to enlarge)

7:48 am MT: This is the same chart, but showing the SPX instead (without the gap). Once again, the target is the 810 area.

Here is the chart of the SPX showing the pullback forming:
(click on image to enlarge)

The SPX (market) will have to drop all the way through 780, into the 775 area, in order to make a lower low. It would probably have to take "catastrophic" earnings from AA tomorrow to create that much selling. I speculate that the fundies will sell a bit today, but they will still want to hang around enough that they are in a "bullish" position in case their wildest dreams come true (vote for Pedro) and AA has a fantastic report with amazing forward guidance (what are the odds of that?).

Now, here's the game traders play, and I mentioned it on the last posting, which is that "stabilizing" really means buy everything in sight because the market is going to take off and "I can't miss the rally or I won't get my blah blah blah." The "statistic" that traders are focused on when they get all panty and googley-eyed is that in 11 recessions since 1938, U.S. stocks have rebounded an average of five months before a recovery in earnings. So even a few bad earnings reports during this upcoming season probably won't derail this train. It will take numerous "warnings" on forward guidance in the actual earnings reports to spook the fundies, and I'm not sure corporations are going to give that kind of guidance, not because caution is not warranted, but because very few CEO's want to "hurt" their stock (options).

So we have an interesting game that will play out during earnings season. CEO's won't want to derail the rally with bad forward guidance, and fund managers won't want to stop buying because they have their livelihoods at stake. In addition, the past couple of months have seen some "stabilizing", and perhaps even enough "stabilizing" that the CEO's will not feel compelled to give anything other than a rosey outlook. I speculate that the big catch phrase in the middle of April will be "foward guidance." We will probably hear that repeated over and over again as justification for whatever the stock market is doing. Just as I speculated that corporate layoffs would take center stage during the January earnings season, I think that forward guidance will be the fixation during the April earnings season.

Now, I must continue on with some projects to get ready for the next stage of this service. So I will post periodic updates on the day, but I must also get some important prep done.

8:28 am MT: Looks like the market is going to go test the 82.75 area on the SPY. The gap on the SPY and the 827 - 827.50 area on the SPX are a tipping point that would likely lead to a quick, sharp drop if the short term support area didn't hold. I am keeping an eye on the 5m charts, but also the 30m charts. If the market confirms a bounce on the 30's, then we could see a mini "earnings season rally" back to the 840 - 845 area and the formation of a Rectangle. If the support area fails, then we get a pullback and a "wait and see what AA does" type of day. We shall see.....

11:55 am MT: The SPY broke below the top of the gap, but the market is still just hanging around. The price action indicative of traders wanting to hang around and hope that AA has good earnings tomorrow.

12:13 am MT: The SPY just pinged exactly off the top of the early day support range that I drew for you at the beginning of the day. The market is rounding around/reverse head and shouldering a bit, so this battle along the 83.00 area becomes an important tipping point. If the market rallies above the 83.00 area, then we will probably see a gap test from this morning's Bear Gap. If the market fails here, then expect a return to the lows, perhaps lower.

Here is a 5m chart of the SPY showing the "resistance" test:
(click on image to enlarge)

On the 30m charts, a flat Bear Flag is forming, but price action is fairly muted right now, so I'm not putting a huge amount of stock in the Bear Flag, although it is there. Intra-day, this could go either way, and mostly because I think enough traders want to hang around and play the hoping game for AA's earnings tomorrow.

One other note: There is a data error on the Prophet charts (which will happen from time to time, especially on the SPY chart, so it's important to process multiple time frames correctly to confirm what you see). It appears that there is a Shooting Star type of candle forming on the SPY daily charts, however, the high of today is actually 83.55 up until now. The high of the wick on the daily charts at 84.27 is only a data error.

Here is the daily chart of the SPY showing the data error Shooting Star forming:
(click on image to enlarge)

You can refer to the 5m chart above to see that the high of the day was actually just a gap test around the 83.50 area, and not a test of the peak from Thursday and Friday.

12:35 pm MT: The SPY double-tapped on the same resistance line, and both times somebody has sold it pretty good on the very short term (5m charts).

Here is the zoom in on the SPY 5m chart double-tap:
(click on image to enlarge)

There is definitely a seller right in that area that would need to be overcome for the market to rally and try a gap test at 83.50.

12:50 am MT: Looks like the AA "hopefuls" are gaining some traction for a possible gap test back in the 83.50 area.

The market sold a bit this morning, but is now just hanging around, which is something I thought was possible this morning. It makes sense that the Googley-Eye Bulls won't want to go anywhere until earnings season defines the next market trajectory. So this is a good point to relax your eyes and your brain and not get caught up in all the goofball gyrations into the close. Right now, for every buyer there's a seller, and for every seller there's a buyer. There's no sense in watching this too closely the rest of the way to the bell.

4:30 pm MT: Market Wrap: When the dust settled on the day, traders decided to hang around for AA's earnings tomorrow. There is nothing of significance on the economic calendar tomorrow, and the AA earnings are after the close tomorrow. So tomorrow's price action is likely to be similar to today, more positioning and jostling by fund managers ahead of the first wave of earnings. It's important to note that both AA and MOS report earnings tomorrow after the close. That means a lot of the pushing and shoving tomorrow will be in the commodity stock groups, and the highest volatility on Wednesday is likely to also be in commodity stocks. MOS is a full-blow cult stock in a cult stock group (Agriculture/Chemicals), and commodity and energy stocks have had plenty of Fast Money cult trading the past several years as well. That means that the market (as driven by commodity and energy stocks) will probably warm up tomorrow, and get fairly volatile on Wednesday.

After today's price action, the chart of the SPX and the SPY don't give as clean a picture as the DIA. The DIA also giving a better picture than the Dow, so keep the DIA in your back pocket of Top Down analysis tomorrow.

Here is a daily chart of the DIA showing three small-body candles pausing along the gap:
(click on image to enlarge)

A closer look inside the price action on the 30m charts of the DIA shows the pause is actually in a fairly orderly Diagonal Channel:
(click on image to enlarge)

The Diagonal Channel forming on the 30m charts is more bullish than bearish (I know, I know.....). It won't surprise me to see the Googley-Eyes try to break the channel to the upside and reach for the 81.00 - 81.50 area on the DIA tomorrow just on cult trading and pure speculating in commodity stocks alone. In other words, don't be surprised if tomorrow is a non news-driven day that carries plenty of speculating and positioning ahead of the AA earnings and the MOS cult-trade earnings.

Remember, trading isn't always about what's sane, it's about what the fundies are likely to do to the market on any given day. Tomorrow is a new day with new price action, so as always, we shall see.....but at the very least, consider the Diagonal Channel the key short term support and resistance areas for tomorrow until the channel is finally broken.