Trading Plan for 5/26

[pay]Pattern notes.
Iran rattles its sabers and draws them, more banks are seized, and the president announces that “we are out of money” while nearly drowned out by the sound of printing presses revving in the background (I made up the last part). Naturally, given all the bad news, Sunday night’s open plummeted bounced.

Apparently the market is unconcerned by these events, or the concern has been fully discounted. The open’s 6-point bounce to 891’00 retraced 61.8% of Friday’s last-minute dive to 883’25. The bounce’s retracement was supercharged by North Korea testing nukes and missiles. The spike down to 878’25  bounced sharply but the prior high wasn’t touched. The bounce was largely retraced, but the prior low wasn’t touched either.

A 4-point surge into positive territory at 11:30’s close made clear that pessimists were getting squeezed for having waited on something that wasn’t coming. Monday’s Trading Plan noted that Friday’s last-minute dive had already undone ineffectual optimism – it’s not surprising that sellers didn’t gain new traction. This puts the market in position for a bigger bounce Tuesday for having absorbed 2-3 steep, deep drops since Friday’s last minutes.

Those steep drops have also chipped away at support. So a bigger bounce won’t be expected if Tuesday’s open isn’t already triggering it. Indeed, if the open isn’t exploiting that it absorbed so much selling, then it’s probably because bigger selling was waiting for the retail crowd to return.

Indicators and Internals.
Holiday technical readings are taken with a big grain of salt, as are any session’s last-minute readings. Either end of the holiday Globex range were accompanied by overbought and then oversold RSIs. This would support expectations for any rally attempt to fail, from whatever level, and eventually to retest or probe the overnight low.

Tuesday’s opportunities.
S&PS resume trading at 6:00pm ET Monday. Sellers would be put back on defense by overnight action that positions for a gap up Tuesday above Friday morning’s 894’50 high. Its follow-through might only fill the gap back to Wednesday’s close up to 901’50; it might probe last Tuesday and Wednesday’s “higher prior lows” around 908’00. But anything that doesn’t close above 915’00 is probably all about refueling sellers. Without a bounce, sellers could make serious progress upon any break under 880’00 Monday night. Apart from a “lower prior high” around 871’00 and the fleeting obligatory support of prior lows, there’s not much untested left in this 11-week old rally.[/pay]