Trading Plan for 6/1

[pay]Pattern notes.
15 points in 7 minutes. Just 30 minutes earlier, Friday’s close had potential for resolving in a steep spike down. A short-squeeze could have been triggered if 910’00 were recovered by 3:30. But it was already 10 minutes past that, and position-squaring was becoming dominant. Its influence began lapsing at 5-7 minutes before the cash session close, while price firmed to 913’00. The highest bar several minutes later nearly touched 928’00.

Those last minutes could have easily spiked down 15 points. Any move at that window would have been steep, making the risk untenable. Unless, of course, a move to that degree were expected. 15 points in 7 minutes.

The late timing window may not predict the move, but it informs us of the move’s sponsorship. Had a breakout of any degree begun just several minutes earlier, its buyers would have still qualified as bigger monied participants, i.e. “strong hands.” The move’s actual origin before 3:00 was a trendline test, which stopped optimistically 1 tick short of touching the range’s low. The entire bounce back to the range’s upper-end was disqualified from being accumulation.

The late timing window also qualifies the breakout. Perhaps the position-squaring influence had waned, but the surge did not extend an ongoing move. Its breakout was fresh, and too late to qualify as durable. This was not the product of buyers being rewarded for absorbing sellers, not even for working through resistance. The gain was leveraged by a lack of opposition. Not just “more buyers than sellers,” but suddenly more buyers.

Optimism was finally excessive at the surge’s peak. The E-mini ES exceeded the SP by nearly 3 points, depicted in the above chart by the blue bar and red line, respectively. The retail crowd was more optimistic than institutional buyers. This isn’t unusual, but the spread is. And from a contrarian perspective it identifies an unsustainable emotional extreme.

The Bigger Picture doesn’t change much. But it does change. The second chart’s multi-week Descending Triangle has been chipping away at support around 800’00. We discussed last week that any triangle could break either way initially, and also that breaking higher from a Descending Triangle tends to be false, retraced entirely, and reversed more substantially in the opposite direction.

Last week’s market also presented several opportunities to discuss a pattern’s “key” high or low. It’s the second touch of any slanted trendline, and there’s no trendline without it. Its break can confirm a trendline break. Or, not. Friday’s breakout attempt may be the latter. The late surge’s peak (circled green) tested prior highs – all prior intraday highs – but the close (boxed in orange) did not recover the pattern’s key high.

The breakout was not confirmed, and buyers expended their energy without gaining traction. This is one step away from a sell signal, but it is not a sell signal. Buyers can regain traction by extending higher Monday more productively. Having failed the test of one resistance, a durable breakout would require closing above the next prior high. This probe failed two tests of resistance, so a new high close is the only valid breakout signal.

Indicators and Internals.
Both 1-minute and 3-minute RSIs were oversold while Friday afternoon’s last low formed. Selling that is so productive doesn’t tend to attract durable buyers. Any product from that situation normally retraces. RSIs also made lower highs just before the last-minute surge. Again, this is not a stable base to launch a breakout.

Monday’s opportunities.
Last-minute breakouts are always suspicious, and even less credible on Friday. A retest of its extreme is likely to fail, but the retest is still likely – until it’s not. Gapping down under Friday afternoon’s 903’25 low would signal a session-long decline, and also reject any need to retest Friday’s high. It would also reject the “Friday Factor” that suggests 15 minutes of strength from the opening tick, regardless of whether that tick gaps up or gaps down.

Any lesser weakness would be likely to recover, and Sunday night we’ll look for pullbacks which might do that. Pessimism would be reflected in a retest of the high whose margin was measured in ticks instead of in points. Probing several points to 933’25 would give buyers a chance to prove they’ve gained traction, and give sellers a chance to prove they did not.

There are no scheduled econ reports, just one minor historic bankruptcy filing to mess with market opinion.[/pay]