Trading Plan for 5/27
[pay]Pattern notes.
Thursday’s session had hardly even feigned interest in trying to reverse Tuesday and Wednesday’s decline. So we already knew how Friday’s session would resolve. The path wasn’t without its surprises: The open gapped down instead of failing an opening surge, and the Globex lows were broken instead of their test producing a bounce back to Thursday’s close. But targeted support and resistance influenced price action, so confidence remains high that we’re tracking the right pattern.
Perhaps the market’s most interesting characteristic has been its recent tradition of delaying a pattern’s resolution until its last possible moment. From last Wednesday’s reversal setup back to April 30’s first rejection of a new high intraday, a plurality of participants has been acting on its optimism and delaying the inevitable. The latest example came as late as Friday’s last-minute dive to new lows, which had been targeted earlier in the day.
Excessive optimism is potentially bearish from a contrarian perspective. The sentiment is a stark contrast to the relentless sell-off from Monday’s high, and indicative of how much more room there is for pessimism to grow and for prices to shrink. Indeed, April 30’s low and its May 9 retest were broken only Friday, all but the last confirmation to Tuesday’s signal that the larger trend had turned down.
Indicators and Internals.
Friday’s volume wasn’t too shabby for the last day preceding a three-day holiday weekend. Once the open had broken under overnight lows, there was almost no chance for sponsorship of a new direction. The pace actually slowed during the rally and ranging at Friday afternoon’s highs. Then it accelerated sharply into the closing dive to new session lows. The spread between NYSE down and up volume was twice as wide as between declining and advancing issues. This ratio obligates Tuesday’s market to reward Friday’s buyers for their relative productivity, unless the open gaps down to new lows. The Friday factor is predicting just that, because both the open and closing 15 minutes trended down.
Tuesday’s opening setup.
No doubt some portion of Friday’s selling was intended to limit exposure ahead of the three-day illiquidity. That can be bullish from a contrarian perspective. The bigger picture still appears to be driven by bigger distribution that is aware of more supply coming down the pipeline. The contradiction between both motivations for selling can be resolved by gapping down sharply. A gap up is possible, but it would only delay the eventual move to lower lows, triggered perhaps by the 10:00 econ reports (Consumer Confidence and New Home Sales).
PROGRAMMING NOTE. Bias signals are available for Sunday night’s Globex session. I will publish new parameters Monday night for Tuesday.[/pay]