Trading Plan for 5/4
[pay]Pattern notes.
First things, first. Friday’s close (basis S&Ps, the Dow and NDX) was the recovery’s highest, yet. But Friday’s intraday high failed to probe either of the two prior sessions’ highs. Those three sessions’ lows each still probed the prior two weeks’ highs as support. This continued overlap is not the character of a new upleg breaking out.
Weak buyers might be benign during any other stage of the pattern. But this stage is probing new highs, so it is by definition a breakout attempt And ineffectual optimism does not make for successful breakouts. Even if the past three weeks are interpreted as trending, the trend is obviously slowing.
Two sessions after Wednesday’s threatened breakout, and with the week having ended, buyers failed to prove a breakout underway. This does not mean sellers have proven anything – weak buying doesn’t necessarily mean that weakness is due to strong sellers absorbing them. But it is more likely. And three days of trying without success is like throwing chum into ocean waters.
The Snidely Whiplash pattern (“curses, foiled again”) has formed from three consecutive sessions probing prior highs without any one of the sessions gaining traction. The ineffectual optimism is vulnerable to resolving down sharply. The character of this resolution should be dramatic at its outset, gapping down sharply. That was made all the more possible by Friday’s post-close surge leaving cash at a 3-point discount. Friday’s post-close surge also narrowed the distance for stronger buyers to take control, which is almost the only way at this stage of the pattern to avoid topping.
Indicators and Internals.
Friday’s last-minute short-squeeze responded to a simultaneous positive divergence we tracked at the last half-hour’s low. The reaction offset the oversold condition with an overbought 3-minute RSI, whose high price was already repeated in the subsequent bar. There is no requirement to trade any higher, nor any sell-off protection.
Monday’s opportunities.
The econ calendar normally starts the week empty, but two reports are due at 10:00, timing that can accelerate or reverse any initial trending underway. A gap under 864’00-865’00 that extends down would signal a session-long decline underway. Any lesser weakness would be attracted up to fill the gap back to Friday’s 876’50 futures close, and probably higher. The downside would include 851’00 and 845’00. A test of either could still recover to close high enough that its sellers were absorbed, and perhaps the threat would finally attract strong buyers. Otherwise, probing higher highs first would still be suspicious. [/pay]