Trading Plan for 2/14

That’s why we call them “patterns.” Two consecutive ineffectual pessimism days don’t happen by chance. They’re followed by a third – two and one-half, actually. Another gap down, and then a recovery to new highs. Friday’s was shallower and faster than usual. Nevertheless, its upside potential is largely satisfied.[pay]

Pattern points… (Setups and technicals)
The expected pattern for Friday deviated in two minor ways. 1) The gap down was likely to extend down first, before recovering to new highs. And 2) the new high was likely to be rejected by a steep afternoon drop to fresh lows.

A steep drop to fresh lows is still possible, since all of Friday afternoon’s buying was unproductive (the afternoon’s new high failed to close above of the morning’s 1327.00 high). Unproductive buying doesn’t point momentum down, but it does make a higher high likelier to fail.

A higher high is likelier to fail also because Friday breakouts tend not to be confirmed by a higher close Monday. And Friday’s close was the first above its four-day range.

At least a temporary new high is possible because a “close quarters” Double Top is in-play. It formed from Friday afternoon’s quick test and retest of 1328.75 while RSIs diverged negatively. The pattern resolves in a new high after meeting its pullback target of at least a 61.8% swing. Friday’s last-minute dip to 1326.00 already met it.

What’s Next… (Outlook and opportunities)
Gapping down Monday to test the setup’s 1323.00 261.8% target could still recover up to 1332.00-1333.00. A real reversal there would target 1306.00-1307.00. Regardless of an intraday high, just closing under 1324.00 would also signal that Friday’s temporary buying pressure had peaked. Rejecting an intraday high back under 1324.00 through a relevant timing window would prove it already. [/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.