Trading Plan for 1/4

New year, new format… I have incorporated various subscriber feedback to reorganize the daily outlook. My thanks to all for your input, which I always appreciate getting.

[pay]At the close (How the prior session ended)
Thursday’s last-minute 9-point plunge offers a charming inaugural for this new section. Perhaps the selling was triggered by terrorism fears ahead of New Year’s Eve celebrations, but it was clearly exacerbated by the thin pre-holiday liquidity. The below chart shows the last-minute plunge circled in red.

The drop originated from a narrow 4-hour range that would have ended the year above prior highs. And it would have left much of the “accident waiting to happen” waiting to happen. Dropping half as much would have done enough damage to all but require resolving down, arguing to hold short through the close. But the drop extended so far that little was left on the table to absorb a relief rally Sunday night.

Pattern points (And technical influences)
A relief rally Sunday night could test Thursday’s 1117.00-1119.00 mid-day range as resistance. Recovering above this range could put into play a retest of Tuesday’s 1128.50 pre-open high.

Only probing 1117.00-1119.00 as resistance – whether overnight or Monday morning – would likely dip back down to Thursday’s 1109.75 low. It printed after the cash session close and its RSIs were oversold. Holding its test would not be assured. But gapping down there might be the best chance to find near-term support for a bounce.

Notice what else was accomplished by Thursday’s last-minute plunge. December ended back at the month’s prior highs, which is natural support. Closing any lower would have triggered a downleg whose initial objective is to fill the gap back to Dec 18’s close under 1198.00.

Bottom line (My underlying premise)
Thanks to the exacerbated plunge, little selling pressure remains available to power lower without gapping down. If Bernanke’s interest rate comments he made Sunday are a non-event, then Thursday’s plunge could be rejected by gapping up above it.

Beware of any shallower strength, whether overnight or at the open. For that matter, beware of a probe above Thursday afternoon’s 1119.00 high that has trouble extending. Tuesday and Thursday’s pre-open highs, 1128.50 and 1125.50, haven’t proved very magnetic. A relief rally is likely, but the new year may be throwing aside old obligations. [/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.