Trading Plan for 5/12
[pay]Pattern notes.
Friday’s open gapped down and spent the entire session in negative territory. The setup might seem to be “ineffectual pessimism” since the open’s low never extended further down. But that would ignore the overnight low’s “new Globex trend extreme” that never delivered its required retest during regular trading hours. Friday’s narrow ranging was was less an inability to decline, and more a hesitation. Afternoon strength was also more optimistic than pessimistic.
Big ideas die hard, and such may be the case with the two-month rally’s notion of being a bull market. The nearby chart defines two sessions in red. 
The more recent one was Wednesday’s session-long decline – from its pre-open (not shown) test of the prior Friday’s cash session high, closing under the prior low. The older red session was the prior Wednesday’s failed probe of (then) new highs that also reversed down to close under its prior low.
Both setups reflect distribution. The two major difference between them is that last week’s reversal wasn’t immediately rejected. And as for the older setup’s rejection, last week’s decline rejected the rejection. And now Friday’s session has left unfinished business below to attract price lower.
Indicators and Internals.
75% more NYSE down volume than up volume produced only 20% more declining issues than advancers. This obligates Monday’s session to reward Friday’s buyers for their relative productivity, unless Monday’s open maintains a gap down to new relative lows. MACD & RSI nearly ended the day having diverged negatively from the afternoon rally, but that was neutralized by the last half-hour’s 6-point plunge.
Monday’s opening setup.
The gap back to Thursday’s cash session close wasn’t filled Friday, which is one of the few potentially bullish factors that could facilitate opening strength Monday. Not gapping down under Friday’s lows would leave open the potential for an intraday bounce. Gapping down to Friday’s pre-open trend extreme could hold its test to produce a bounce, too.
This week’s earnings announcements, econ reports and Bernanke sightings offer plenty of catalysts for volatility. If news before Monday’s open like MBIA’s earnings doesn’t send the market plummeting, then it could instead clear the decks for a relief rally back to Thursday’s ESm 1397’75 cash session close. According to MACD & RSI deterioration into last week’s high and low, a relief rally would only clear the decks for a bigger downleg to get underway.[/pay]