Trading Plan for 6/18

If the market wanted to trend down… then Monday afternoon’s surprising plunge opened the door to beginning that slide. The market did not step through it.

Pattern points… (Setups and technicals)[pay]
Greeting Mondays with extreme sentiment often creates a price extreme. The overnight rally into Monday’s open was quickly restrained by 1636.50, but not reversed. The late-morning probe up to 1641.00 was restrained, but reversed only to retest 1636.50. Sentiment extreme wasn’t necessarily a price extreme.

At least, not immediately. A late-afternoon 16-point plunge down to 1624.00 was triggered by an FT headline warning Wednesday’s FOMC meeting would announce tapering.

Some words about the “plunge.” It never took price into negative territory under 1618.00-1620.00. It barely tested Friday afternoon’s 1625.00 “lower prior high” as support. And it was retraced to 1635.00 — above the open’s gap up.

The close was still testing 1633.00-1634.00, within a few ticks of the prior four sessions’ highs. Perhaps Bernanke will endorse tapering Wednesday. Monday’s plunge in reaction to the headline implies the market won’t like it. The plunge’s recovery suggests the market doesn’t expect tapering to be announced — not before probing a fresh high.

[/pay]What’s Next… (Outlook and opportunities)[pay]
An early fresh high above 1638.25 is now much less vulnerable to reversing down sharply. Monday afternoon’s plunge can resume immediately by gapping down under 1620.00. Otherwise, a test of 1646.50-1648.00 is likely. [/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.