Trading Plan for 11/2

[pay]Pattern notes.
Will it be the best of times, or the worst of times? Friday’s pattern was eerily similar to Friday, Oct 16, 1987. And in one respect, it was cunningly different. The similarity implies that this week will start out like Monday, Oct 19, 1987, crashing all the way. That’s if the similarities continue playing out. If not, then this week’s start could be a record-setting rally.

The similarities are all different flavors of productive pessimism: gapping down, trending down through the morning, steep slope, fresh lows into the close, largest daily loss of the series, closing at trend lows. A lot of damage was done to the chart. The one single difference seems almost irrelevant at this point.

But here it is, anyway: the template followed in 1987 extended sharply lower after the noon hour, and this past Friday did not.

The weekend’s impending illiquidity was one of the biggest reasons why I had warned Thursday that a sell-off could target new lows. Perhaps the morning’s mass exodus included those fearful orders trying to beat the afternoon crowd. But the crowd had already been there, done that, and couldn’t pressure price further into the close. The above chart shows a 61.8% retracement, natural support that is capable of preventing a second consecutive lower close from confirming Friday’s break under uptrending support.

You know what they call people who short size into an already deeply discounted close at support? Buyers. Wouldn’t it be cunning of a rally to have started by sucking in so many sellers just to trap them Monday with a short-squeeze. It would be worthy of recovering above Thursday’s high.

Thursday’s rally had matched a template that allowed for an immediate fall back to new lows for the week. It is based on alternating days of greater intensity – Friday’s move was going to be larger than Thursday’s steep rally, whichever the move’s direction. If the same template remains intact through the weekend, it predicts that Monday’s move will also exceed Thursday’s size. If that move is up, then its target would exceed Thursday’s 1054.00 high. Its ultimate move would target 1071.00 / 1083.00. And it would still be a corrective bounce.

Extending down is still the likeliest outcome. (Caveat: Down was likeliest for Thursday, too.) Friday’s new low close was where it needed to be for confirming the decline underway, and for renewing its sell signal. Simply opening weaker won’t be enough to confirm the decline survived the weekend, but extending deeply lower through the open would be the market’s version of an iron-clad guarantee.

Indicators and Internals.
The two charts reveal Friday’s afternoon’s positive divergence among RSIs. Both the 3-minute and 81-minute, among many others, did not become oversold on the afternoon’s last low. That low was in the last hour, but still early enough to be credible. So were at least two others intraday. Gapping down under a prior low can negate this immediately. It can also make a gap up that much more credible.

Monday’s opportunities.
Be sure to read my comments atop the heads-up for the next day’s econ reports – especially the comments applying to today. This particular alignment of news items at 10:00 – and I call it an “alignment” as if it were happening among planets – this alignment has been becoming a fairly consistent disruptor. Gapping up above Friday afternoon’s 1040.50 high and firming would help greatly to absorb the news. That same news is why even the weakest open can’t be taken for granted. [/pay]