Trading Plan for 10/2

If Tuesday’s rally doesn’t teach laypeople about “discounting”… then nothing can. Monday’s drop had built into its price the potential for Tuesday’s news. Perhaps Friday’s drop was part of that discounting, too. Will the next lesson be, “Corrective Bounce”?

Pattern points… (Setups and technicals)[pay]
Rallying after buyers failed to gain traction on the prior day must begin properly, by gapping up above that prior day’s high. The rally otherwise tends to fail. Monday’s buyers didn’t gain traction for their late effort, and Tuesday’s rally did not begin by gapping up. That undermined the rally effort.

Nevertheless, Tuesday afternoon’s sellers only retraced 61.8% of the morning’s rally, but not all of it. And a last-minute 7-point spike up probed the morning’s 1690.50 high by nearly 2 points. Not exactly a rejection of the morning’s rally.

Despite the late surge, buyers again didn’t gain any traction for the rally effort either. But neither did sellers. Tuesday morning’s rally has as much potential to resume Wednesday, as does Tuesday afternoon’s decline.

Recall the images I posted Monday morning of two sample shutdowns from 1995.  While they’re not intended to be predictive, the second shutdown’s market reaction (boxed in red) is interesting today. If it were to track, then Wednesday would resolve in a fresh low.

As it happens, Monday’s 1666.75 low could stand to be retested. Not for its oversold RSIs so much as for leaving its gap down outstanding. Again, there is no reason to rely on a one-off pattern from an event that last happened 17 years ago. But retesting Monday’s low would not necessarily break lower.

[/pay]What’s Next… (Outlook and opportunities)[pay]
Resuming Tuesday afternoon’s decline to retest Monday’s 1666.75 low could form a durable bottom for at least a corrective bounce. The default scenario isn’t necessarily to rally, but gapping up above Tuesday’s 1689.50-1690.50 highs would get every benefit of the doubt for extending higher intraday with potential t to 1703.00.[/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.