As set forth above, the risk this morning is that current prices are ticking back within the 3750 to 3800 balance area from last week. We will open with a solid, true gap lower on the heels of a poor high in yesterday’s distribution. Poor highs typically lead to backing away first and then should be carried forward for repair. In essence, longs with poor location got stuck yesterday and are backing away.

Overnight inventory is about 90% net short, and we are currently trading in the lower third of the overnight range. A large unfilled gap is still in play just below the overnight low, with the top of the gap at 3811.25 and the bottom at 3797. Expect the gap to provide support until it doesn’t. Continuing to hold above the gap without entering it is the most bullish outcome and would support a new entry point and continuation trade. Some acceptance within it or a full fill would be less so and would potentially change the current tone a bit, perhaps running our current stop.

The overnight selling is old business, taking care of the poor location longs trapped near the poor high. Our early focus is on whether or not they are done or not. Failing to take out the overnight low early would tell us that they are done, and new business can commence, which “should” be new money buyers coming in.

Given the inventory position and knowing what we know about the sellers’ nature in the overnight session, there remains a potential for an early fade. We need to pick our spots wisely using either the first one minute high or across back up through the open as the key to reversal after any initial drive lower.

If the overnight low holds or the fade is only slightly into the old full gap fill, target the overnight halfback first at 3831. Should the gap get breached and we have very bearish internals and faster tempo, this would tell us that newer sellers are coming into the market and we should target the gap bottom at 3797.

A.F. Thornton