By Mike Paulenoff, MPTrader.com
This has been one strange, whippy type of a session. From a larger perspective after the big downmove Monday into Tuesday morning, the indices have been trading in a relatively narrow range since Tuesday morning -- I would say in about the bottom 25% of the range from the Monday-Tuesday decline.
From that standpoint, today's action is not too surprising because that downside reversal likely ushered in a period of bearishness or weakness, and the digestion of that initial phase has been ongoing for the last couple days. But today, in particular, the range has been incredibly narrow. Each time the market seems to be headed in one direction to make the move either up or down, it seems to fail right after it breaks above a certain a micro support or resistance levels, and then reverses and spends the next hour or two in the opposite direction. Then it tries to break out on that side and fails to do so, and what you end up with is a coil.
We have coils that have developed in both the E-mini Nasdaq and E-mini S&P. The key is the E-mini Nasdaq, because that coil has triangular characteristics -- moreso than the coil that developed in the E-mini S&P.
In the E-mini March Nasdaq, you have coordinates in the last two days on the high of 1411.50 and 1409. On the downside, on the low side of the coil, you have coordinates at 1387 and 1393. Whichever side of this range breaks, you should get a follow-through of at least 10 Nasdaq points. So if it breaks above 1409-11, it should go to our next upside recovery target of 1420-22.
On the other hand, if it fails and goes back down below 1393, then I suspect that we're going to take out Tuesday's low of 1387, the post-Saddam reversal low, and head towards critical lows that were established on December 10 at 1375.50. I've mentioned these lows from December 10 before. They are in all the indices the most critical lows on the board. If those lows are taken out in any or all these indices, that will constitute not only a near-term sell signal but an intermediate-term sell signal as well, and will suggest to us in no uncertain terms that a meaningful top formation is mature and starting to break down in the E-mini indices.
As for the QQQ, the Qs have a similar coil to the E-mini Nasdaq, as you might expect. The coordinates on the high side are 35.02 and 35 even, and there's a third one at about 34.85. If it can get above 34.85, then I think it can extend this rally to test the 35 area again. It needs to get above 35.05 to get anything going. If that's the case, then I think you can go to 35.12-.15 to complete the recovery rally off of Tuesday's low.
On the other hand, if you can't get anything going and reverses back below 34.58 or 34.56, at that point you'll have a breakdown and I think the coil will break apart to the downside, break Tuesday's low at 34.42 into a prime test of the December lows. Once again, those Decembers low are critically important on an intermediate-term basis, and the December 10 low on the Q is 34.13. If that breaks, we get confirmation that a meaningful top is in place.