Trading Plan for 4/20 – And a big picture view.

[pay]Pattern notes.
Did you know that roller coaster enthusiasts have a wide choice of organizations to join where they can share their passion with like-minded thrill seekers? Imagine the effect on their membership rolls if they were exposed to the following “Big Picture” charts. Perhaps not that many if they don’t like the roller coasters in danger of derailing from its tracks.

This first chart, alone, resembles an entire roller coaster ride. It includes the bear market’s two most recent lows from November last year (“NOV”) and from March last month (“MAR”). Each low’s recovery differed in its structure: the previous bounce recovered a majority of its ultimate gain in one week, while the current recovery took three weeks for the same move. It’s not a small difference, but it’s a lonely one, as most other major characteristics are repeated. Most important is that their steep trajectories going into each low were similar, as were the relatively short durations between directional changes.

Neither characteristic on its own disqualifies the low from being a bottom, but they often do. Neither characteristic defines the current bounce’s peak, but it is interesting to note two other similarities: the current bounce’s high last week equaled the previous bounce’s time and price measurements. It is also interesting that the last downleg’s origin (“JAN/FEB”) has been retraced. Other than being natural resistance, this price point doesn’t provide much analytical value. However, for reasons described later, this leg’s sponsorship is all but depleted and lacking energy to sustain an attempt to break any higher.

This second chart includes the bear market’s 2007 origin (“JUL/OCT”) highlighted appropriately in rose-color. The first chart’s section is highlighted in green, only because brown would obscure the price bars. I include this image to put into perspective the current range’s height and duration compared to the bear market’s damage. These characteristics don’t really speak to whether a bottom has formed. But the relatively short and/or shallow bounces during 2008’s portion of the decline reveal that plenty of unsatisfied selling pressure awaits any recovery attempt. This pressure never need be probed for its influence to inhibit bounces.

The final Big Picture chart shows the 2002-2007 rally, a roller coaster enthusiasts dream. It also shows the preceding decline’s steep bounces that gave sellers ample time to lighten their loads. The rally’s buyers hiked easily through the field above it, its brush having been cleared by everything from machete to controlled burns. The current bear market, depicted in the prior chart and highlighted here in yellow, has only been weeded.

In the same chart’s lower-right corner, highlighted in green, is the current bear market’s two most lows. This is the range depicted by the first Big Picture chart above. Our roller coaster enthusiasts view of this is a ride that has returned to its beginning. It’s just a platform for loading new passengers for another turn. This perspective would have served well at 2007’s high, and it might continue serving for the current bounce’s purposes (although there’s reason to think otherwise, detailed later). But the Big Picture wonders whether the bear market has ended and a bottom has formed. In this context, contrary to higher highs making new lows less likely – when the lows already require being retested – new lows would likely be deeper.

So, what about this move up from March’s low. Has the bear market rally ended? Its minimum target was 800’00, which could have sufficed as the bounce’s peak. It didn’t, which started shaping the perception of a bear market rally underway. The bounce’s target was alternatively 821’00-825’00, whose tests produced two reactions down, but neither closed under a prior low to reverse momentum down. Enter 844’00, which was the target either of a bear market rally, or of a bear market rally’s first leg. Since meeting it over a week ago, the question has been whether higher highs are waiting to begin the next downleg, or beginning the next upleg.

So far, each probe above 844’00 has been dismissible for being only a retest of prior highs, or noise around prior highs, or noise around a prior high’s retest. And so far, each higher high’s reaction down has substantiated the dismissive attitude. Friday’s new intraday high falls into the same category for closing no higher than a prior session’s high, and so fails to qualify as a breakout. This creeping territorial gain is a sneaky way for bear market rallies to maintain their momentum. It is Newton’s first law of physics waiting for the third law to be imposed. This week’s quarterly earnings deluge might finally bring an opposing force that ends this leg of the roller coaster.

Please post any questions or discussion points to this blog post’s comments section. Next week I will update the big picture, and review major indexes.

Indicators and Internals.
Both 1-minute and 3-minute RSIs were oversold simultaneously at Friday’s early-morning pre-open 853’75 low. The timing makes its retest only somewhat likely. A similar setup intraday would be more representative of influential participants. That would be Friday morning’s 856’75 low, where RSIs were simultaneously oversold again. Expiration may have influenced their recoveries, but cannot prevent a required retest.

Monday’s opportunities.
This is a big earnings week, most notably among Banks, in addition to glimpses offered by IBM and AMD. The only econ report due is Leading Indicators 30 minutes after the open, timing that tends often to reverse or to accelerate any initial trending underway. Bernanke speaks at 2:00, so there is plenty of opportunity to skew price action. Friday’s expiration session missed every opportunity to gain traction during a relevant timing window. The subsequent Monday tends either to duplicate or to mirror Friday’s expiration charcteristics. This makes a blow-out rally unlikely, and suspicious if one were to develop.[/pay]