Trading Plan for 2/1

[pay]At the close (How the prior session ended)
Thursday’s 1074.25 low wasn’t tested until the afternoon’s bias environment was lapsing. And then the 1070.25 overnight low’s required retest delayed a recovery attempt. The drop finally found a low at 1067.50 after 3:30. It was too late to launch a short-squeeze, and any bounce was doomed. In fact a round-trip up to 1075.00 resolved in fresh lows at 1066.50.

Pattern points (And technical influences)
Had Friday retested Thursday’s low in the morning, then sponsorship for a bounce would have been much more likely to appear. Friday morning dives can get ahead of themselves, exacerbated by sellers who want to avoid the afternoon rush. If the drop doesn’t follow-through, which it rarely does, then the weekend’s impending illiquidity suddenly makes traders fear not being long.

But this Friday morning was spent barely triggering a weak bias-up signal and and barely fulfilling its target. The afternoon’s decline started much later, and from a detour well into positive territory. Its sponsorship was real sellers. Weaker sellers eventually joined in, with too little time remaining to later become disenchanted with their trade. And it was already too late in the day for counter-trend buyers to welcome the risk.

The Christmas rally was already living on borrowed time. The prior week’s dip had stopped short of testing prior lows before recovering, so its recovery was suspicious. Last Thursday’s close signaled the trend had reversed down. It was the first to break back under a prior low, which was last Friday’s lower close confirmed.

Now September’s high is being tested as support. Thursday’s low was first, and then Friday’s lower close confirmed. No net improvement after four months is rare enough, and rarer still to reverse back under two prior highs – in a single downleg. This is the first dip since March’s low to actually test two prior highs as support. This is the biggest threat yet to the rally’s momentum.

So pivotal is this test of “lower prior highs” that it could produce an obligatory bounce back up to 1082.00-1083.00. Otherwise, the new drop’s next landmarks are 1048.00 and 1037.00. A close under Nov 2’s equivalent low of 1026.00 would confirm a more serious downtrend in-play.

Bottom line (My underlying premise)
If sponsorship for Friday’s sell-off is real, as described above, then it is likely to extend into next week. A bounce Sunday night or at Monday’s open would likely resolve down, probably from 1082.00-1083.00. The next lower major support is 1065.00, and its break would target 1056.50. These two levels serve the dual purpose of signaling and confirming the next portion of the downleg is underway, having potential to 1037.00 and 1026.00. [/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.