Trading Plan for 5/12

Wednesday was a day of reckoning… Proving this week’s bounce was only corrective, retesting last week’s low closes, and giving a glimpse of the extreme bearishness predicted after Friday’s close. If last week’s low was not a durable bottom, then this week’s low could have much, much further to go. [pay]

Pattern points… (Setups and technicals)
Wednesday’s stunning drop retraced two days of rallying – three days, counting Friday’s false start that fell intraday from nearly 1352.00 to under 1332.00. Sound familiar? Wednesday fell from above 1358.00 pre-open down to 1333.00.

Session lows repeatedly tested 1335.00 as support. This was essentially Thursday’s open and its futures close, Friday’s futures close, and Monday morning’s low. Each test was interrupted by a new relative high. There was no bullish reason to return to 1335.00 again.

The nearby chart depicts a bearish reason to return. Notice last Thursday’s first test of 1335.00 down to 1332.00. This was the “pivotal low” to the move’s 1325.25 actual low. A retest of the actual low is all but ensured after a bounce above the 1344.75 interim high returns to the pivotal low. The bounce into Tuesday’s high was simply a detour.

Wednesday’s low stopped short of touching the 1332.00 pivotal low. Its previous retest already predicted a retest of the 1325.25 actual low. This leg’s low should visit at least 1331.50, so Wednesday’s higher low reflects temporary optimism. And the interim bounce has further refueled sellers.

What’s Next… (Outlook and opportunities)
Wednesday afternoon’s ranging was resisted by 1340.00, which held repeated touches. I can hardly call them “tests.” That pessimism keeps open the door for one more corrective bounce, either to 1342.50 or 1346.00. But no bounce is necessary before resuming a much deeper decline at a much steeper pace.[/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.