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Digestion Day
By Mike Paulenoff, MPTrader.com

It's an interesting day so far largely because the intraday oscillators were fairly oversold at last night's close. With the saturation of good news on earnings in addition to Sony releasing poor earnings and poor projections for the next few months, the Nikkei got clobbered, and that's what put the pressure on our futures market.

After the initial sell-off in the first hour of trading, generally speaking the indices have been on the offensive, retracing much of today's declines. However, neither index, the S&P nor the Nasdaq, have been able to claw their way back into positive territory, at least on a sustainable basis. The S&P has managed to peak into positive territory intraday but has not been able to sustain those levels.

In its totality so far today's action represents a digestion day, a digestion of the losses where the market is so oversold that it needed to rest. When you think about it, both these indices have had pretty sizeable declines since the October 15 highs.

In the E-Mini S&P, for example, you've had roughly a 35-point decline, and the bounce off this morning's lows roughly at 1020 has hit a high of 1031 and change. So you've had a 10-11 point retracement of roughly a 35- point decline, which is a 30% recovery. This is a very normal technical recovery. It appears we're having a technical recovery of a firmly established near-term downtrend that's in development.

The question is how much more upside is there for this recovery, and my suspicion is that the December E-Mini S&P can get to about 1033, perhaps 1036, and the E-Mini Nasdaq, which is at 1381 now, can probably get into the heavy resistance level between 1390 and 1396. At that point, however, I think the indices will turn south again and embark on another downleg, and that downleg will be pretty intense, and should take out the lows established this morning.

For traders of the QQQs, which are mapping an intraday pattern very similar to the E-Mini Nasdaq, the Qs have a low just under 34, which was our objective off of the move from the October 15 high at 35.87. The rebound off the 34 level has led to a move of 50 cents or so, which is at 34.50. I think towards the mid part of the afternoon that retracement level to 34.50 will be tested, possibly even broken as the Qs maybe go to 34.60-.65. But I do think it is countertrend and that the resistance will prevail and turn the Qs back to the downside for another look at 34 even. That pressure to retest the lows may occur tomorrow or even tomorrow afternoon.

Nonetheless, that's the way my work is setting up -- that there's a recovery rally, a digestion phase, and that'll give way to another plunge that'll go through 34 on the way to 33.20.

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