Trading Plan for 10/12… And the bigger picture.

[pay]Pattern notes.
Today’s special term is: momentum peak. Whether its context is a rally or a decline, a momentum peak can serve as the actual extreme, or it can be exceeded briefly. What it cannot do is be exceeded for any relevant time, and extended through any relevant resistance.

For example, the bounce underway into last week’s open had potential up to 1054.00 (circled red on the first chart to the right). It was probed Tuesday, and the leg that probed it was the session’s high. A close above 1054.00 on the day it was probed would have put into play a higher target. Instead, momentum peaked. Wednesday’s narrow range was not inappropriate in this context.

Thursday’s higher high also was not inappropriate – regardless of gapping up, ranging entirely in positive territory, above prior highs. Indeed, despite fluctuating 10 points intraday, the open’s 1061.00 gap up was re-printed at the cash session close. So, despite buyers gaining ground, they gained no traction. Once again, Friday’s narrow range was not inappropriate.

Of course, Friday’s narrow range also wasn’t overtly bearish. The last hour’s predictable rally had nothing to do with the pattern and everything to do with being a Friday. Friday’s last hour is the week’s least relevant, so is its probe above Thursday’s high. Notice a similar situation following July 30’s momentum peak (pictured in the second chart to the left). The last-hour surge was retraced at the following open, with a vengeance, back down to the momentum high (circled red). This would put Monday’s open in peril.

Rejecting Friday’s last-hour surge need not reverse the trend down. But it wouldn’t be bullish by default. Notice that while July 30’s momentum peak didn’t prevent successively higher highs, the higher highs each failed (third chart to the right again). And they failed back down to the momentum peak, which maintained its attractiveness for five weeks.

This is not necessarily a roadmap for the coming five weeks, let alone for the coming five days. It is only meant to illustrate the relevance of a momentum peak. A decline is still capable of forming and without any further delay. The momentum peak only undermines rally efforts; it is not a sell signal, except that it makes sell signals more credible when they appear.

The bigger picture.
The first opportunity for last week’s momentum peak to undermine a rally is pretty significant. The rally being attempted is also attacking prior highs, the Labor Day rally highs.  This was also a momentum peak (shaded red in the fourth chart’s top-left), and its next day ranged narrowly. That next day was an expiration session. No net movement since then is additional confirmation to the Labor Day upleg’s expiration being tied to Quad Witch’s expiration, which was the premise at the time.

Labor Day also started the quarter’s third month. This is a common time for equity analysts to touch base with the companies they cover. Regardless of the impending expiration’s influence, September’s rally makes clear the analysts liked what they heard. The subsequent dive makes clear the rally fully discounted their enthusiasm. The dive might have brought pricing back down to levels that could react positively to surprises. By the same token, last week’s rally might have renewed the original pricing problem.

We’ll know soon, because quarterly earnings are in full swing by mid-week. The momentum peak suggests that rallies won’t be sustainable. Reacting very well to early results might anticipate more good news than possible. And that’s if the news is good. Monday and Tuesday offer a window to “hunker down” defensively before some disappointments can trigger a sell-off. Of course, the problem with another defensive dip is that it also risks letting sellers gain traction.

There are two important setups from recent lows below that would attract a sell-off. The lowest point was a new Globex trend extreme that requires intraday retest. The following Monday’s bearish opening formation then indicated that any following gains would comprise a temporary correction, and not durable accumulation. If September’s dip down to recent lows was itself a correction, then there is no reason to retest these lows. Not unless the dip wasn’t a correction, after all.

Conflicting motivations can co-exist. The Labor Day upleg recognized corporate fiscal improvement (top-line, bottom-line or both). This may be overtaken by macro-economic factors, currency deterioration, political developments, etc. – any number of concerns that place a higher premium on risk than on earnings. Third quarter earnings improvement may have been real – it must have been real, based on the price action – but it may have been irrelevant. Again, we’ll know soon. The greatest certainty might take until Thursday, with quarterly earnings underway and expiration hours away.

Indicators and Internals.
Last-minute technicals are always suspect (and that’s being charitable). Friday’s last-minute readings are predictive only by coincidence. For what it’s worth, Friday’s last-hour surge ended on RSIs diverging negatively. No other intraday reading left unfinished business.

Monday’s opportunities.
Opening weakness would be credible for having extended beyond the momentum peak. Friday’s last-hour surge up to 1068.50 invites the retracement back down to 1054.00. Back under 1065.50 would initially reject Friday’s last-minute surge. Back under 1063.00 would reject Friday afternoon’s complacency. The wild card is that Monday is a Federal holiday with no econ reports and less liquidity, quiet that invites noise. A bullish environment would exploit this opportunity by dipping. We’ll see how impatient buyers actually are.[/pay]