I mentioned over the weekend that 1) the short-covering rally would be apt to persist into the onset of earnings season and reach 1200. Here we are at the onset of the earnings season and slightly above 1200.

Earnings have been net positives all year for the stock market, and with the sequential uptick in Q3 GDP over Q2, along with sandbagged earnings estimates for the financials, coupled with what should be still healthy yoy earning growth rates (Q3 11 vs Q3 10) investors should not be fearful of the actual earnings this quarter. If anything, they should be mindful of the forward guidance given that 1) GDP is forecast to sequentially slow for the next 3-4 quarters, and 2) Alcoa just confirmed forward guidance last night will be less rosy than in recent quarters. The devil will be in the forward-looking guidance statements from companies.

This allows investors and traders to generally set aside the impact of the earnings announcements for the next several sessions and direct our attention to other considerations. However, peak earnings season for financials and Apple will be Monday and Tuesday Oct 17-18, please make a note of that for potential rotations.

My main forward-looking concern is the timeline of the EU Summit having been pushed back from Mon-Tues Oct 17-18 to Sunday Oct 23. There may be an earnings-related buying climax on Tues Oct 18 (think Apple and financials reporting ok numbers that lead to profit-taking, and all the more so if accompanied with crappy guidance from the financials and Apple's now much less certain future ~ Apple's expectations and perceptions are sure to shift amongst investors in the coming quarters with the very sad loss of Steve Jobs)

But even more immediate and pressing than the Oct 17-Oct 23-24 window that is Wednesday Oct 12. Behavioral correlation models were showing Tues Oct 11 and Wed Oct 12 (the onset of the earnings season) to be a good time window to signal at least a pause in the short-covering rally that began a week ago Tuesday. This behavioral model anticipating a pause in the short covering rally is further enhanced when we overlay the 3 and 6 week periodicity of the FOMC meetings and FOMC minutes.

There is a three week periodicity between the FOMC meeting and the FOMC minutes. The FOMC meeting of Wed Sept 21 introduced Operation Twist. OT was a huge contributing factor to a very sharp 4% intraday selloff afternoon following the OT statement. The SP500 fell from an intraday high of 1204 to 1155 on Wed Sept 21. What Bernanke told investors that day did not bring cheer to investors. In fact, you could say by their behavior that day, investors were downright sore, disillusioned, and gravely disappointed by his statement. No doubt the FOMC minutes will largely echo the message to investors on Wed Sept 21.

Bottom line: Buyers had better beware of a potential sharp selloff today that is related to the FOMC minutes echoing a message that so disappointed investors on Sept 21. Capiche? This behavioral finance nuance is primarily for traders looking to get positioned short near what may be the culmination of a week long short covering rally. But investors had at the least monitor investors behavioral response to the Sept 21 FOMC minutes as well. The FOMC echo may not prompt investors to sell the SP500 from 1204 to 1155 today, but the SP500 could well selloff below this mornings globex low at 1181 by end of day.

There are two other behavioral finance observations for traders to consider today. Look-back to the short-covering rally off the Aug 22 low on the chart below. Note that price paused for a day at the bearishly sloped 21 day average then strongly breached that moving average for 3 full trading days until the short-covering rally ended on Wed Aug 31. Notably too from that look-back period, the high of Wed Aug 31 exceeded the high of Tues Aug 30 by 11 points. If you look-back to Monday of this week, you will see that the SP500 has strongly breached the 21 day average for three trading days now. If you look-back to Tuesday (yd's) high at 1195 and add 11 points, you have a price target of 1206 for Wed Oct 12. The high so far is 1203.75, the very same spitting price as the high of Wed Sept 21 FOMC meeting. It would be best to see the 1203.75 slightly penetrated this morning sometime well before the FOMC minutes, then see the market correct from there.

Though I should surely hasten to add, the high for the day may already be in at the 1203.75 FOMC-related double top, as the way that high was set has the earmark of a buying climax on a 60 min bar chart, and a high pole buying climax on a point and figure chart.

Click on image to enlarge!

For more from John Bougearel, visit Structural Loginc.