Trading Plan for 5/21

[pay]Pattern notes.
My concern after Monday’s 26-point rally was that buyers were on-track to retest prior highs all too soon. The concern was alleviated by Tuesday’s sideways ranging. Then came Wednesday’s gap up above Tuesday’s highs. Rather than take time trending up and capturing territory, buyers bit off more than they could chew. Prior highs were attack as much as was required – 3 points more, actually – entering the noon hour back under Tuesday’s prior highs.

The past two weeks have been all about trapping buyers. The more trapping, the bigger the reversal down. Tuesday’s last half-hour drop showed  the market was running out of buyers to trap. Wednesday’s open certainly trapped buyers. The reversal down didn’t actually cross the line into negative territory until 3:20-3:30, having already falling 7 points since 3:00.

Not to say that Wednesday’s late downleg can’t extend down further, perhaps not as briefly as Tuesday’s Globex open, but recovered nonetheless. Well, less than Wednesday recovered Tuesday’s late drop – a bounce back up to the 911’00 area would neutralize Wednesday’s late selling. Buyers would gain traction above 915’00 for a more thorough retest of recent highs.

The alternative to bouncing here is that no more buyers are available to be trapped. This resolution should make itself obvious by extending Wednesday’s decline down sharply – if not from the open, then possibly after an opening bounce as described above. Under 901’25 there are only brief patches of obligatory support on the way down to the gap at Friday’s 883’00 close. Wednesday’s close was under 901’25, just late enough to undermine its credibility, but not to invalidate it.

Indicators and Internals.
Wednesday’s decline ignored at least two positive divergences (i.e. bounces failed to recover prior highs). This tends to mean that knowledgeable and influential market participants are in-touch with much bigger supply coming down the pipeline. A possible third divergence developed through the cash session close, and might yet be productive to save the day, or ignored on the way down to sharply lower lows.

Wednesday’s opportunities.
Lots of econ reports to keep the market busy. I questioned yesterday’s session-long rally setup in the face of Gheitner’s testimony and FOMC news. Any other such high-profile events Thursday might work to the rally’s advantage, undermining whoever currently has the ball. But opening weakness should extend dramatically if it’s valid, and recover into positive territory if not extended dramatically.[/pay]