We have two Pattern Signals fired for today's trading in the S&P;, the first of which is the 90-10 Low Continuation & Reversal. The concept behind this signal originates from the 80-20s set-ups as described in "Street Smarts". But, rather than using the 80-20 guidelines, the parameters have been narrowed to 90-10. This reduces the pattern's frequency of occurrence, but increases its probability as a forecasting tool.

The 90-10 Low Continuation & Reversal signal is fired when the day's open is within the top 10% of the day's range and the day's close is within the bottom 10% of the day's range. This signal is telling us to expect continuation of the downmove in the morning, and then a reversal sometime during the day.

The second Pattern Signal fired for today's trading is the Momentum Pinball Buy. The Momentum Pinball Buy and Sell Signals represent an attempt to identify potential periods of very short term buying and selling exhaustion so as to capture a possible move in the opposite direction. Before any action is taken, however, the Momentum Pinball Buy signal requires a breach of the first hour high for confirmation.

Because Momentum Pinball Buy/Sell signals are intended to flag the end of a short term trend, it is not unusual to see, on the same day, other Pattern Signal firings which indicate likely movement in the opposite direction. When this occurs we know that a break of the first hour high/low represents a market bias in the opposite direction as originally indicated by other Pattern Signal firings.

Chart created by Tradestation.

On the S&P; Half Day chart, all three of our Cycle Indicators moved lower with yesterday's activity and are now within oversold territory. This does not necessarily mean that we should expect them to soon turn. If short term cyclical patterns have returned to normal behavior, we should see a period of base-building develop before they launch their next cycle higher. Our first clue will come from an upturn in the 7 period %K. A turn of this indicator from its overbought or oversold zone is usually a good indication that a new trend has begun and at least several more bars of new short term direction should follow.

Economic reports on today's agenda include State Unemployment Initial Claims at 7:30CT, Wholesale Trade Inventories at 9:00CT, the EIA Natural Gas report at 9:30CT, and Consumer Credit at 2:00CT.

ADX levels on 15 and 30 minute charts are above a value of 30, indicating that the trend to lower prices is still intact in these timeframes (see ADX charts below). If we were triggered into a short position by a price reversal pattern and/or Oscillator Divergence near the 20EMA in either of these timeframes, we would have the makings of a Holy Grail setup. A trade based in part on a Holy Grail pattern can take as its minimum profit target a return to the most recent swing pivot extreme, which would be yesterday's 1530.25 low. If the move to that level can occur on Momentum Confirmation, there should be even more downside in the making.

The 90-10 Low Continuation & Reversal signal is telling us to expect more downside in the morning. Whether that might be tradable or not is difficult to determine, but regard any rally prior to yesterday's low being broken as a potential short entry point. Watch for a Reversal Pattern and/or Oscillator Divergence on a retracement move towards any 20EMA or the 1534.50 Daily Pivot. Yesterday's 1530.25 low would be a potential target, but that doesn't negate the possibility that price may go lower, and we should be prepared to take advantage of the move should it occur.

From there, keep a sharp eye out for price reversal patterns and/or 3/10 Oscillator Divergence on potential lines of support below this level. Possible reversal zones include any of the three Pivot System Support Levels, the 1525.50 level of the Normal Low Range Projection, and the 1521.00 level of the Extended Low Range Projection.

The aggressive trader can try to catch the initial reversal turn itself, should it occur. The more conservative might be better off just letting it happen, and then attempt to get in on the retracement. Holy Grail patterns are particularly effective for this. Pay special attention to the 5 min. 20EMA. Another technique is to draw a downward trendline along the highs of a 5 or 15 minute chart and use the break as your trigger into the trade. Make sure that you have a logical place to put your stop within your preferred limits of tolerance.

Going into trading today, we have a signal implying more downside with the possibility of a strong reversal. However, such signals should never be interpreted in mechanical fashion. They are to be used as a "heads up" for the day's trading . . . not as a strict set of rules, but only as an aid in the creation of a strategy. Pattern Signals are an indication of what has happened on a fairly consistent basis in the past, but they make no guarantees of the future.