Why It Takes More Than Just Divergence
The September S&P
futures (SPU and ESU) celebrated the end of the market’s summer
vacation by opening Tuesday’s session with a +2.25 point gap to the upside. At
10 am, the ISM index was released, showing an expanding manufacturing sector for
the second month in a row. The futures experienced some “sell the news” before
filling the opening gap and finding support at the Daily Pivot in the 1,005
area, but they didn’t stick around the lows very long.Â
The first and second test of R2 and June/July
high resistance in the 1,015 area were turned back by selling during the
lunchtime lull, but after some “backing and filling,” the third attempt had
enough broker-buying steam behind it to hit stops and force a snowballing wave
of short-covering. The futures attempted to break and hold R3 at 1,022 three
times before running out of time at the closing bell.
The September S&P 500 futures closed Tuesday’s
session with a gain of +14.25 points, and finished at a new 15-month high.
Volume in the September ES was estimated at 771,000 contracts, more than double
Friday’s pace and above the daily average. On a daily basis, the contract tipped
its hand with the break of the cup and handle pattern and the June/July highs,
but some follow-through is needed to confirm the breakout.Â
The healthiest type
of follow-through would be a narrow consolidation range day above the broken
1,015 resistance, which is now support. On an intraday basis, the 60-min chart
also broke a cup and handle pattern, showing a good example of how overbought
can become more overbought, and how divergence is not a signal by itself (see
chart). The 1-min 3-Line Break chart closed with a long bias and a break price
of 1,020.50.Â
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Wednesday is the quietest day of the week for
economic reports with Construction Spending at 10 am ET, and its consensus of
0.5%, and then the Fed’s Beige Book at 2 pm ET.
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Please feel free to email me with any questions
you might have, and have a good trading day on Wednesday!
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