Trading Plan for 5/5

Today’s “MACD & RSI” presentation will be held at 1:00pm ET as planned in the Charting Room. It will be recorded for later playback.

[pay]Pattern notes.
The two-hour rally into Friday’s close recovered from a new session low. New session lows, actually, since the last low was the retest of a low that had printed one hour earlier, interrupted by a 7-point bounce. And not just new session lows, but new sessions, actually; the afternoon lows had probed the overnight lows.

Had the recovery stopped there it would have robbed sellers of the traction that had dropped S&Ps 21 points from the ESm 1427’00 pre-open high. Instead a very late surge extended the recovery to back above overnight highs and noon hour lows, in a bid to restore traction to buyers. The last-minute ploy may have succeeded, but any immediate follow-through Monday won’t be from a very stable base. The pre-open high is a “new Globex trend extreme,” and its required retest may be all that stands before a new downleg to end this two-month rally.

The nearby chart-stack compares S&P cash to the Dow and NDX, and all have now retested the last higher consolidation’s “higher prior lows.” The relationship among each does not suggest a bottom has formed, since the recovery was clearly led by the more speculative NDX, while the bluer-chip Dow outperformed the broader-based S&Ps. There is potential to one more higher high (nearly 20 S&P points above Friday’s high). It should be met very quickly if Friday’s high is broken, and Friday’s high should break quickly if at all. The burden of proof is on buyers to exploit Friday’s last-minute recovery without delay.

Indicators and Internals.
MACD & RSI diverged positively into each of Friday’s lower lows, and each produced a bounce back above its prior relative high. So with MACD & RSI having established their credibility throughout the day, it is interesting that they diverged negatively into the last-minute surge. That alone shouldn’t be enough to derail a retest of Friday’s pre-open high, but it only makes the base that much less stable.

Monday’s opening setup.
MSFT removed its bid for YHOO Saturday, so Monday’s open will otherwise be on a sour note. So I should note that the magnetic attraction up to Friday’s high can be neutralized in the near-term by gapping under Friday’s ESm 1406’00 low. The nearby chart shows how unlikely that would be, and so how difficult it would be to recover. If sellers don’t take control Sunday night, then I would expect a flat to higher open that eventually retests Friday’s pre-open high.[/pay]