The NASDAQ-100 looks poised to test its October 2nd intra-day low of 1656.57 on Monday. Here is a daily NDX chart (click to enlarge):

Notice that the red uptrend line is converging with the blue support line.

The NDX is closer to testing its October 2nd low than the SPX is, and the signal it gives will also likely apply to the SPX since the NDX usually leads the SPX.

This test may occur Sunday night in the futures, so the equivalent low for the NDX futures (NQ) is 1652.75; only 13 points away, which is a small daily move for the NDX. The equivelent level for the SPX futures (ES) is 1012.00.

This is a daily SPX chart of closing prices. Thursday’s rally is starting to look like a bear flag (red lines on chart). If that proves to be the correct interpretation, a 100% completion of the pattern (blue line) implies a test of the October 2 intra-day low at 1020 at some point within the next few days.

The market plunged on both September 1st and October 1st. Perhaps that was because the big funds finished their month-end window-dressing. Are we seeing the same thing now? Monday will be the first trading day of November.

SPY rallied on light volume Thursday, so bulls must be cognizant of the possibility that the market is constructing a bear-flag retracement of the plunge. However, volume in the futures (ES) was not light, so this may be a bullish indication if traders were reaching for something leveraged rather than boring old SPY.

But even it does turn out to be a bear-flag, bears must be careful not to short it too early. Flags are similar to wedges in that they are sharp and pointy. They keep pushing up to a pinnacle, blowing out all your stops in the process.

Breadth ramped up to a very high level on Thursday. If the market can stay roughly flat as the internals unwind a bit on Friday, that will be a bullish development. All the bulls need to do is keep it flat and they win.

SPY didn’t leave any gaps behind on the way down, so when looking for upside targets for the market, the next one would be the QQQQ gap on October 28th at 42.35. The XME was halted at its 10/28 gap on Thursday, so maybe the Q’s will be stopped at their corresponding gap today. The XLF has two gaps above also.

All the major ETF’s left un-filled gaps on Thursday. That’s a very bullish sign, in the short term. As I write, the overnight futures are in a bull-flag formation, so that is bullish if it lasts until the open. It is ironic, but short-term bull-flags can construct a bear-flag on a higher time-frame.

Keep an eye on the BKX banking index – its 20-day moving average is poised to cross below the 50-day if the banks don’t rally strongly today. That could be a bad omen for the market. It just doesn’t seem like the sort of thing a fabulous bull market should be doing. The banks appear to be worrying about the FOMC meeting next week.

I have three scenarios in mind for today:

1) It will be a re-run of Tuesday where the market eroded the support at the October 8th gap (105.79 for SPY) by going mostly sideways with choppy action. Today, it would be eroding the support at the October 6th gap (104.05 for SPY), the top of which stopped the decline on Wednesday afternoon.

2) SPY will “echo gap” under the October 6th gap, and the SPX will proceed directly to test the October 2nd low at 1019.95. It could bounce and print a bullish hammer candle there.

3) A sharp short-covering rally, possibly triggered by an upside surprise in the GDP report that would retrace some of the plunge.

As I write this, the futures have held the 1037 level, making a low at 1037.25 just before 7pm, Wednesday night. So, that’s some solace for the bulls so far.

Let’s see what the GDP report is and how the market reacts to it. GS has likely lowered the expectations to very low levels with their downgraded estimate Wednesday morning.

The advance/decline line has not cracked yet (click chart to enlarge):

But that doesn’t mean that the bulls shouldn’t be praying to the breadth gods tonight.