Trading Plan for 5/11

[pay]Pattern notes.
The last time I specifically addressed the bigger picture was April 20, six weeks off of March 6’s low. That Friday had finished at a new recovery high. My analysis spooked S&Ps into a 38-point drop the following day (highlighted orange). The following morning fell briefly another 6 points, then recovered intraday to avoid confirming the prior day’s break.

In the three weeks since, sellers have been afraid of their own shadows. Until Thursday.

Not that buyers were any more aggressive. The high coming into April 20 wasn’t probed intraday until nearly two weeks later (highlighted yellow). The rally had not peaked, but that leg had. The next breakout finally came last Monday, in the form of a 30-point surge. Buying was aggressive, but it wasn’t accumulative, which would have been confirmed by closing higher the following day.

Wednesday’s attempt to renew Monday’s breakout was as good as it gets, awaiting only the confirmation of a higher close Thursday. This proved to be elusive again – more so, since the pre-open surge was reversed well into negative territory. In fact, the cash session ended back under Monday’s alleged breakout high (futures firmed after the close).

The two general perceptions are that Friday’s recovery wiped away the damage done Thursday, or that Thursday didn’t do that much damage. Actually, Thursday didn’t do enough damage, which means Friday’s recovery didn’t recover.

Tactics during the two-week range before last week clearly identified sponsorship as being weak buyers. The character of last week’s rally attempt was different, and the biggest difference was how quickly dips were recovered. Dips had previously remained depressed long enough to trap shorts while attracting new buyers to cheaper prices. Last week’s buyers gapped up four times, but gained no traction beyond Monday’s close. Friday’s gap up trended up intraday, but remained within the prior day’s range and accomplished nothing new.

Friday’ “ineffectual optimism” is either trapping buyers, or it is hyper-optimism. If it is the latter, then it should extend higher without any delay, targeting 942’00-945’00, or even 959’00-962’00. Otherwise, the rally may as well have peaked already Friday.

Indicators and Internals.
3-minute RSI was barely overbought at Friday afternoon’s session high, hardly enough to require its retest but enough to consider it. Regardless, it was RSI’s second lower high on the session’s second higher high. The 1-minute RSI was clearly overbought, and apart from being on Friday afternoon, their combination makes some sort of retest likely.

Monday’s opportunities.
No econ reports are due – in fact, nothing very high-profile until Thursday and Friday’s PPI and CPI. The week will start with news of new taxes, modest in the scheme of things. Thursday’s loss consolidated too briefly for Friday’s immediate recovery to extend higher Monday. The combination of Thursday’s new high intraday, and Friday’s inside day that attacked Thursday’s high, would be complemented by failed probes of higher highs Monday. We’ll look for early strength to fail – regardless of whether it originates from a weaker open or stronger – but probably not extend down too far intraday. Otherwise, a higher high maintained through a relevant timing window would signal higher targets in-play. [/pay]