The “Bernanke Pattern” is still technically valid.  This should serve as a reminder that analogs can serve as excellent guideposts but can also get you killed if you treat them as gospel (or ignore risk parameters).  Listen to what the market is saying now — not what you want to hear.  Volatility and uncertainty remain high so it’s best to give the market some room to breathe on the downside or adjust your position sizing.

Meanwhile, John Tortorella gives the bulls a piece of his mind:

More Tortorella gold: John Tortorella: Post Game 6 5/9/12

Must Watch: John Tortorella “Next Question” Mix by DJ Steve Porter (HD)

The past week laid some damage to some important sectors, namely technology and financials.  Defensive stocks were well bid in a flight to safety and stability.  This is not the scenario you want to see as a bull.  For the market to make any serious headway to the upside you’ve got to see technology working higher.  The tech sector must be in a leadership position for any rally to stick.  This weakness could manifest itself in another move lower before the next round of buying comes in.

Option expiration has had a bullish skew in recent history with six up, 3 down, and one flat in the last ten occurrences (weekly bars).  We could easily make some new lows and stage a turnaround that catches everyone off guard.  Tuesday’s trade will be absolutely critical to getting the week’s direction correct.  If we sell off hard Monday and Tuesday doesn’t bounce, we’re likely looking at the lows of the week coming in on Friday’s trade.  If we bounce Tuesday or rally from Monday then we’re likely looking at the highs of the week coming in on Friday.

Winners: $NWSA, $DIS, $PFE, $PEP, $VZ, $T, $EXC

Losers: $JPM, $MS, $GS, $FCX, $EMC, $ORCL, $CSCO

I’ve gone back to the pattern recognition software and run the data again with the price action footprint since March to see which patterns we should be focusing on now.  I ran September 2010 – present and found the following instances of matching analogs.

Click on each instance and compare the patterns to present time.  I’m not trying to persuade anyone to abandon their bearish stance or get super bullish.  I just want to present the data as objectively as possible.  Remember, it’s only time.

For reference, here’s where we’re at:

Instance 1:

May 2009 – March 2011.  I’m starting with the most recent because I’ve recently mentioned this pattern as a distinct and important analog.  The patterns are so close that I’ve started calling them the “Bernanke Pattern.”

Instance 1: Aftermath

The result, as we can all remember was bullish throw over top followed by a deep correction.

Instance 2:

May 2005 – March 2006.  I felt a strong affinity for the 2005 pattern as soon as it was flagged by the program back in March.  It is proving to be quite on target.

Instance 2: Aftermath

The result was a prolonged throw over top and a correction of epic proportions.

Instance 3:

October 1997 – August 1998.

Instance 3: Aftermath

The result was a decent retracement of the correction followed by new lows (September 1999).  As most of us remember, the bull market highs were made in early 2000 and then crashed (not shown).

Before you mention the obvious fact that three analogs is statistically insignificant, please note that these were just the ones that illustrated the patterns best.  Of the nine patterns generated only one had any immediate large scale downside.  It appears that new highs, or at least a relief rally is on deck before any additional significant downside.  Note: more volatility and running of sell stops could be in the cards before this resolves, and anything can happen.  Be careful out there.

6 of the last 8 trading sessions have gapped down.  While my indicators say caution we’re still in an overall uptrend and a rally can come at anytime.  If you can’t find and edge, this is a fine time to stand aside and do nothing.  The market will be here when you return.

I had a gut feeling this week that the S&P would take out the April highs just to really frustrate everyone, but I guess there really weren’t enough shorts in the market to take another run at the stops.  The market is starting to look frighteningly like a repeat of 2011.

You can’t deny the similarities (although I’m sure you could argue about where the points of reference should be applied.  But don’t.  Okay?).  I can’t pretend to know where the market is headed but this feels inversely similar to a period when we were climbing the wall of worry.  Back in February I wrote:

One of the principal functions of the market is price discovery.  This market has already defied all the odds, so I doubt very much that it’s just going to tag 1360 and turn around and retreat.  No, this market wants a breath of fresh air and some clear blue sky above 1370.  Whether it gets 4 or 40 points worth of jogging room is the question everyone would like to know.

Back then I was referring to the fact that the market was very unlikely to just trade to a previous resistance point and fail.  If we use that same principle of price discovery on the downside I find it very difficult to believe that this market doesn’t want to see how many stops are resting below the 1355 area.  I feel that the probability of the market turning on a dime and rally hard starting Monday is quite low.  Where it ultimately finds support is entirely up to market participants.  At this point in time, I don’t see any major stress in the system that would derail the larger bullish trend.  In short, I think this is a run-of-the-mill pullback unless something dramatic changes.  It may be a high energy pullback, but it is normal corrective behavior after such a long bullish run.

Winners: $MRK, $ABT, $MDT, $CVS, $MO, $CL, $KO, $T

Losers: $DVN, $APA, $AAPL, $BAC, $MS, $CAT, $DOW, $EMR

Tech, materials, and energy led the losing sectors this week while defensive names held up well, particularly the utilities and consumer staples sectors.  I’ll be glued to $AAPL watching for signs of a bottom.  I’m looking for tech and financials to lead to the upside should the market push higher.

The immediate reaction of traders this morning has been to sell.  Here is the opening chart for the S&P 500:

It doesn’t take a rocket scientist to interpret this as negative.  Below is our pattern recognition analysis of days where the Employment Situation data was released and the S&P 500 futures gap down 0.3% or more.  The blue lines represent different theoretical curves for the dominant patterns the market has followed in the past.  Will the market follow these historical patterns today.  No guarantees.  But this should give you a better roadmap than the insta-analysis you’ll be hearing all morning.  Hint: hold off on buy orders off the open.

Warning: This report was generated using very generic criteria.  In the report I run for myself based on our proprietary analytics the afternoon session is much weaker.  Be careful out there.

Question is, does the fact that the Governing Council of the ECB is meeting in Spain this week rather than in Germany mean anything important?  Market participants may just be too crisis-fatigued to notice that the ECB may be signaling something important with the location change and how it applies to the potential Spanish crisis playbook.

Big focus next week will be on Friday’s jobs number.  Many nonfarm payroll weeks have strong trends into the report.  Couple that with the ECB meeting and I would not be at all surprised by a very directional week up or down.  A week full of economic reports means that strength or weakness on Monday and Tuesday could have good directional follow thru into Friday unless there is a huge surprise announcement.

Sector strength and weakness was a cloudy picture last week due to earnings and other factors.  The bull case is still pegged to the overall continued strength and leadership of the technology sector and this story is still playing out.  Still, my position remain the same.  Long caution, short precision.  I’m still very bullish in the long-term but the market is due for a correction before charging higher.

Winners: $AMZN, $AAPL, $UNP, $NSC, $DVN, $BHI, $EMR, $WMB

Losers: $PG, $WMT, $WAG, $MS, $BAC, $FDX, $CAT, $DOW

Interesting seeing how important China is to both the Australian and New Zealand economies.  I’m back at the desk Wednesday and will be posting some thoughts on some observations from my travels.

Many were looking for this market to rotate into the lagging sectors and give a another push for the bullish run. It appears that the market is rotating the wrong way as defensive utilities were the top performing sector this week.  Technology was notably weak, including the all important $AAPL.  It’s important to note that safety names like $PG, $PFE, $XOM, and $AEP were well bought this week.  I’ve mentioned all of these in the past.  I’m particularly attentive of downside risk when $XOM is a top performer in the $OEX.  This is where big money goes to hide out.

I’ve been finding it a little difficult to write anything clever or insightful about the market.  More and more I find the need to tune out the news because everything seems stuck on an endless loop of fear, uncertainty, and doubt.  What does matter is new material information and how the market reacts to it, but we haven’t had any decent new news in a long while.  Lately, hearing the same old stories drummed up is exhausting.  I’m sure I’m not the only one with headline fatigue waiting for the market to do something.

I thought for sure after Tuesday’s rip higher that the market would squeeze into option expiration Friday but it wasn’t meant to be.  Buyers are indicating that they’re not willing to press here.

The trend is still higher but how we get there is uncertain.  The market is telling me that caution is warranted.  My long-term out look is still for higher prices.  Could the market decide to to rip higher and take out the March highs?  Absolutely.  Could I be early on the caution and regret it.  Sure.  I still don’t think this is a market to chase higher.  Basically, I’m long caution, and short precision.

Winners: $BMY, $PFE, $PG, $WMT, $VZ, $KFT, $XOM, $AEP

Losers: $QCOM, $AAPL, $GOOG, $EMC, $GS, $BAC, $AA, $BHI

To sum things up, we have:

• Sovereign fears reentering the market (although nothing new)
• Momentum stocks weakening
• Respected indicators turning bearish

If we don’t bounce early in Tuesday’s session, we will trend lower for the rest of the week.  Scenario 1: We correct and weak hands are shaken out and long-term buyers are found — new healthy highs right around the corner.  Scenario 2: We pivot higher and have very limited upside above previous highs (I will turn very bearish at this point).  This is the throw-over top scenario @MktAnthropology has written about in which the correction is delayed and deeper.  Bottom line is the bull market is still in tact but it will be rough waters for a little while longer.

MAMO Chart (blue line crossing zero-line is bearish):

The market closing on lows isn’t exactly confidence inspiring but it wasn’t exactly unexpected either.  At least we closed off the weekly bottom.  Overall, this week’s sell off is appears to be nothing more than profit taking initiated by the fear of slowing economic growth.  There is no evidence of a macro seismic shift in allocation or a panicked, uniform safety trade.  This appears to be a part of digesting gains and the current situation reminds me of the sentiment around October 2009 and March 2011.

Objective indicators are still keeping me on the neutral-to-bullish side of the equation.  This could change fast.  I would like nothing more than for volatility to shoot through the roof and have some good trading markets again, but I don’t think that scenario plays out in the near-term.

The story is the same as it’s been for a while: we’re in a bull market that no one believes in.  Respect your stops and respect your strategy but think constructively and not destructively about the market.  We will never, ever, ever go back to the lows of 2009.

Winners: $HPQ, $INTC, $EMC, $AA, $WMB, $CAT, $HD, $WAG

Losers: $MS, $BAC, $C, $CVX, $OXY, $AAPL, $BMY, $AMGN

Here’s the one chart that’s flashing a warning sign of risk-off.  Could be a false alarm but I want you to have it on your radar: