Strength on the upside has been diminished. The volume can’t catch up with the price and showed a bearish divergence. Yesterday’s high could be the small pullback high, and now go further down to test 1153.00-50.00 range or possibly the 1134.00-30.00 range if ES fails to hold price up above 1162.50-1161.
Monday and Wednesday are the Fed POMO bond re-purchases this week, and the Monday POMO was bigger than usual: $6.3 billion, the largest since this form of Quantitative Easing Lite was announced. The Primary Dealers who tender bonds typically use some of the proceeds to purchase stocks, which is one of the reasons the market is levitating in the face of harsh economic conditions.
We may see buying support around the 1153-52 range if the price shows signs of sliding too quickly. But the current market is ripe for declining. A healthy pullback is really needed, if only to make buyers more enthusiastic once QE2 kicks in.
Keep this in mind: QE2 is already priced in to the market. We believe we should expect a pullback before the next liquidity injection in order to establish a lower starting point before the market is ramped up again. The question is how low the price should go. As long as 1075 line holds, the second round buyers should remain confident.
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ESZ0 Daily chart
ESZ0 Intraday – 60 Minute bars
