By Mike Paulenoff, MPTrader.com
The rally has been pretty contained off of the big down move yesterday that took us to the lows for the decline that started Thursday or Friday afternoon (depending on which index you use). First of all, the form of the rally appears to me to be countertrend. That is to say that the Friday-Monday declines have given way to a relief rally just to work off the extreme near-term oversold condition.
In the December E-Mini S&P, this sell-off took us from the 1039 high last Friday to the 1015.75 low Monday afternoon. At its best level of the day earlier this morning the S&P rallied 10 points off of yesterday's low, getting up to about 1025 and change, and right now as we speak is 1022 and change. So there may be more rally to come, but so far the rally form itself exhibits a countertrend pattern. It could go, for example, to 1028 or 1027 and make a marginal new high, so to speak, for the day, but that will not change the fact that the form of this rally is countertrend and when it runs out of gas, it should roll over in a big way.
Specifically, when the December S&P E-Mini breaks 1019 the next time down, I think it will unleash a powerful follow-through to the downside that will take out 1015.75, or yesterday's low, and head into the 1009 area next. All of which is on its way to test the critical near-term pivot from September 12 at 1005.25. If that breaks, it will trigger an intermediate-term sell signal.
On Nasdaq, the decline was from last Thursday's high at 1405 into yesterday's low at 1359.50. The index has rallied back to 1383 on the December E-Mini contract so far where it looks like it's completed its upside correction. If it hasn't, maybe it can go to 1388. But it, too, has a countertrend form, and when it rolls over the next time down, it needs to break 1367, at which point it should collapse below 1359 on its way to 1345-47 next. Then, it too should test the September 12 pivot at 1330 to generate new intermediate-term sell signals.
So as last Thursday-Friday's highs remain intact, all the action so far has been bearish and is unwinding in a bearish stair-step decline.