Trading Plan for 5/2
[pay]Pattern notes.
Optimism ahead of weighty news leaves less potential profit on the table for good news to provide. It also makes it more difficult for good news to be perceived that way. And the market is that much more of a sitting duck for bad news. This morning’s Employment Situation report is being preceded by yesterday’s rally, and by further gains overnight. So the news has its work cut out.
Not that optimism is bad. The right amount of gain and trajectory can break through resistance with decent momentum to allow nothing but a favorable reaction to the news. It can also take price high enough before the event for prior highs to offer support in case of a negative reaction to the news. Thursday’s optimism produced a breakout to new relative highs, which has the advantage of being fresh so it can still attract converts to help fuel it further.
The breakout’s freshness is a double-edged sword. Bad news won’t help to attract anything but sellers. And mediocre news might make recent buyers question why the market’s current level won’t repel price back down as it has done every time since January.I described a potential false breakout pattern discussed here at the beginning of the week, which Wednesday’s FOMC reaction tried to fulfill. Yesterday’s optimism either put that on hold, or invalidated it altogether. We’ll soon see.
Indicators and Internals.
Thursday’s internal spreads were lopsided: 3.2 times more up volume than down volume produced only 2.4 times more advancing issues than decliners. This obligates the market to reward Thursday’s sellers for their relative productivity, and every day’s delay makes any further rallying likely to fail. MACD & RSI diverged negatively at Thursday’s last highs, which doesn’t preclude a higher high, but it does make a higher high likely to fail.
Friday’s opening setup.
S&Ps have already traded higher overnight. Price emerged from a consolidation pattern, so its gain represents a “new Globex trend extreme” that requires being retested during regular trading hours. The requirement would aid the recovery from a negative reaction to this morning’s Employment report. A favorable reaction would only raise that bar. The retest wouldn’t be required today, but I will be looking for a long-entry parameter so long as the open doesn’t gap down under yesterday afternoon’s ESm 1403’00-1404’00 lows. A higher open might still turn into the false breakout scenario.[/pay]