Trading Plan for 10/6

[pay]Pattern notes.
Is it, or isn’t it? Last week’s drop was everything we could have wished for a durable bottom to form. Push pessimists into selling, bounce soon enough to leave unfinished business below, peak soon enough to keep pessimism alive, retest and neutralize the unfinished business. So, is this a bottom, or not?

Not. This might still prove to be a bottom in the making, but the decline isn’t likely to stop on the proverbial dime. In this case, that is the new low at ESz 1102’50, which didn’t elicit much reaction into the close. Declines are unlikely to end on Fridays, let alone Friday afternoons. Let alone the week’s last-half hour of trading. The same goes for the origin of new uplegs.

We’ll know shortly whether Sunday night’s open gaps up. There’s a danger zone of messy resistance spanning 1112’50-1114’50 and then 1117’00-1120’00. Gapping above either or both areas would recover last week’s “higher prior lows” and allow a corrective bounce targeting 1133’00-1136’00 (this would neutralize Friday’s opening gap up at 1134’25 that wants to be retested). Of course, gapping up would be excessively optimistic, leaving unfinished business below – the gap back to Friday’s close.

Just firming into either area would be messier and more difficult to exceed, or to maintain, probably because lackluster strength isn’t enough at this stage of the pattern. What a great opportunity that would be to reverse down to new lows, then recover to close positive. That could be a bottom. That had better be a bottom.

With or without initially bouncing, the decline’s resumption would be signaled under 1104’00. Its test could first produce a bounce that fills the gap back up to Friday’s close. But its break would put into play 1095’00 and 1076’00. Frankly, there is a template in which Monday’s open gaps down to the lower of these targets. In that case, the downleg then underway could make last week’s drop look rather puny in comparison. And the size wouldn’t be the scary part.

Indicators and Internals.
Not much here to discuss. Signals have proved valid intraday, not just Friday but all last week. This means the decline hasn’t changed the rules we focus on, while it breaks the mainstream rules everyone else is watching.

Monday’s opportunities.
No econ reports are due, not that the market would find very relevant any snapshot that was taken before the last week. Tuesday afternoon’s FOMC minutes will be interesting – this week’s event might confuse or segment market participants, and that can only enhance the volatility. [/pay]