Trading Plan for 2/17

[pay]Pattern notes.
That was quick, but unavoidable. Now let’s see if it sticks. Thursday’s last-hour surge was doomed to failure, for having originated after the last hour began and after the last hour had already printed new session lows. Monday’s Globex session (no cash session on Washington’s Birthday) gapped down Sunday night and extended down to 810’00. The balance of the session firmed nearly 9 points until the last two hours dropped to 808’25.

This is Thursday’s pivotal low, the low prior to the 805’50 actual low. It is obligatory support and often produces an obligatory bounce. But just touching the pivotal low all but ensures eventually touching the actual low, whether only to probe it or to break it as part of a downleg tumbling lower. This pivotal low’s touch hasn’t yet happened intraday, which dilutes the requirement somewhat. But Thursday’s last-hour lows are due a retest nonetheless.

Retesting Thursday’s low hasn’t been the market’s only requirement. There’s a long-standing expectation for these lows to give way to another downleg targeting last year’s lows. The past several weeks’ repeated attempts to break lower have chipped away at support, and each new try has had the same likelihood as the last. If the current attempt fails, then the next attempt would also be likely to break lower.

If the current attempt fails, then one clue would have been the S&Ps relative performance to the Dow. While the 500-component S&P 500 has been ranging widely, it has also been ranging sideways. The 30-component Dow Industrials average has been trending down. Being exclusively “blue chip,” the Dow is a better representation of bigger instutional thinking, and that thinking has been defensive. This is potentially bullish from a contrarian perspective.

The 100-component NDX-100 is more heavily-laden with technology issues, and its outperformance reflects a speculative sentiment. This would be bullish, too, if it were occurring while S&Ps were actually trending down. Instead, the speculative sentiment has been rewarded already, and its vulnerability to profit-taking might put downward pressure on the broader market. NDX could still save the day by holding a retest of its own prior lows, saving S&Ps from freefall. But any relief, no matter the duration, would not be durable.

All of which relies upon actually extending Monday’s break into this week’s regular trading hours. An obligatory bounce might gain traction overnight if 814’00-816’50 doesn’t push price back down. I will update comments overnight as market conditions warrant. But the plan is generally to find resistance and timing to short in anticipation of a bigger slide Tuesday.

Indicators and Internals.
MACD & RSI diverged positively ahead of Monday morning’s 11:30 Globex close, at least 3 points before the ultimate low. There wasn’t a requirement for a bounce, but the pivotal low’s obligatory support should resolve it anyway.

Tuesday’s opportunities.
A couple of econ reports due are nothing compared to the stimulus bill signing in Denver, a growing focus on the next major funding packages, and now the automakers. My favored scenario is a morning drop that bounces from either 799’00 or 790’00, and then an afternoon drop that starts making its way towards 774’00. We may shift gears and look for a bigger and longer bounce, but not for a new upleg.[/pay]