Trading Plan for 2/7

To breakout, or not to breakout… That is the question. Thursday’s close was technically a breakout. Friday’s was either its confirmation, or another breakout. Either way, it’s sticky.[pay]

Pattern points… (Setups and technicals)
Here’s an interesting picture of a Head & Shoulders (highlighted orange) that formed Friday afternoon. It is generally assumed to be a reversal pattern. Actually, almost as often it is a continuation pattern. And that’s how it performed Friday.

When a (an?) Head & Shoulders breaks higher, its target is either a 100% or 200% extension from the pattern’s left shoulder and right neckline (circled green). The higher was met at 1308.00 before the cash session close. It held another test afterward.

Whether first breaking higher or lower, that break then normally reverses more substantially in the opposite direction. If this pattern resolves normally, it will retrace back to the 1304.25 neckline, then reverse much lower.

One small obstacle to reversing down is the 1308.50 pre-open high. It is a “new Globex trend extreme” that requires being retested intraday. It was created by a weak-handed surge just ahead of the Employment Situation report. It was retested to within 1 tick just after the cash session close. Close enough.

A bigger obstacle to reversing down is Thursday’s breakout. More precisely, it is its confirmation Friday of a second consecutive higher close. Thursday’s new high close was dubious for failing to hold an intraday probe above prior highs. Friday’s higher highs came only during its last hour.

If Friday’s new high close truly confirmed Thursday’s breakout, then 1324.00 is in-play. If Friday’s new high close thinks that it is the breakout, then it will learn Monday that Friday breakouts rarely succeed. And if Monday’s open rejects Friday’s last hour gain, then the next objective below could be 1284.25.

What’s Next… (Outlook and opportunities)
1304.75 was a relevant level Friday. Its recovery would have confirmed the open’s drop had been absorbed. But it struggled at the morning’s 10:15-10:30 bias timing window. Then it struggled at the 1:20-1:30 window. It was likely to recapture Friday’s close. It remains vulnerable through Monday’s open.

Immediately reversing back under Friday’s afternoon’s 1303.00-1304.00 lows would be interesting. Because late trending was up, a “session-long decline” would trigger. Reversing the Head & Shoulders would target at least 1298.50. That’s dangerously close to Friday’s 1298.00 lows, whose support was also chipped away overnight.

Avoiding a reversal down would make new highs likely intraday. Avoiding an afternoon reversal – to which new highs would still be vulnerable – would next target 1324.00.[/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.