Trading Plan for 10/19, and the bigger picture.

[pay]Pattern notes.
Friday’s weakness bordered on being “ineffectual pessimism.” That would be bullish, at least enough for a near-term probe of last week’s highs, and to retest Thursday’s night’s 1095.50 “new Globex trend extreme.” The setup isn’t missing any elements, it just has one too many.

Friday’s open gapped down, probed the prior session’s low, and spent the entire session in negative territory. That’s a lot of pessimism. What makes it ineffectual is the close being above Thursday’s 1083.00 low. Well, it was, and it wasn’t. S&P Cash closed nominally above Thursday’s low. Futures closed under it.

Several factors undermine the last-minute 7-1/2 point dive, such as it being last-minute and 7-1/2 points. The dive’s timing would normally destroy its credibility, especially on a Friday. The dive’s measurement is a difficult pace to maintain. The fact that futures closed under 1083.00 actually tends to be bullish for trapping shorts.

The problem with assuming anything about Friday is that its expiration influences can skew timing and relationships. And Monday’s open probably won’t be conclusive because expiration’s influence is a wild card that stretches through the next session’s morning. It already caused the afternoon’s 6-1/2 point no-bias rally. Otherwise, Friday’s session-long decline would have ended at session lows.

Expiration’s influence also delayed fulfilling Friday morning’s buy signal. But it was fulfilled. Monday’s open might also toy with normal timing parameters, but that doesn’t undermine the pattern.

The bigger picture.
Four arrows on the above chart identify four gaps up during the current upleg from Oct 2’s lows. The optimism could have been tempered by a pullback or two. But Tuesday’s dip is the only probe of a gap. Even Friday’s session-long weakness (highlighted pink) barely pierced the range between Wednesday’s low and Monday’s prior high (highlighted green).

Obviously, the lack of a pullback one day doesn’t prevent the next day from rallying. It just stretches the rally thinly. That can be ignored so long as price action ignores it. But Wednesday’s gap up to new highs failed to confirm Thursday. Whether or not sponsored by ineffectual weak hands, Friday’s selling stopped short of correcting anything.

The upleg has reason to extend higher: the gap back to Thursday’s 1091.75 close should be filled, and its 1095.50 “new Globex trend extreme” requires intraday retest. These attractions are meanwhile a safety net to help recover from further selling, There is room down to 1071.50-1074.00 without ending the upleg. Extending this upleg has potential to the 1106.00 area, perhaps up to 1114.00-1117.00.

Regardless of whether this upleg extends higher, its extreme optimism already suggests that it won’t end gently. Its next stumble should be a tumble – perhaps brief in duration, but still sizable in degree.

Indicators and Internals.
RSIs left no unfulfilled signals. A negative divergence did accompany the last half-hour’s afternoon high, and it did produce a 7-1/2 point dive. Between the signal already having been productive, and the timing not being highly reliable, any further weakness is probably unrelated.

Monday’s opportunities.
Was it, or wasn’t it? Opening strength above 1086.00-1088.00 would all but confirm Friday was ineffectual pessimism. It would also recover Thursday afternoon’s low whose opening break had signaled Friday’s session-long decline. The gap back to Thursday’s 1091.75 cash session close would be in-play, along with a retest of the overnight 1095.50 Globex high.

Sellers would also be marginalized if initial weakness held a test of either “lower prior highs” at 1082.00 (highlighted pink on the nearby chart), or of Friday’s lows – the same tactic that reversed Wednesday and Thursday’s opening dips (highlighted green).

A gap down or quick drop maintained under Friday’s lows would keep sellers in charge through the morning. No high-profile news is due before noon. The earnings and econ calendars are sparse, highlighted by a Housing metric at 1:00, AAPL reporting after the close, and the anniversary of 1987’s Black Monday. Happy Anniversary![/pay]