Trading Plan for 6/22
[pay]Pattern notes.
Was last week the turn? Clearly, buyers have lost traction. But have sellers gained it? Last month’s Descending Triangle (defined in green) broke higher instead of lower, which we knew at the time to consider false. The breakout’s confirmation opportunity failed, and June’s first two weeks (defined in red) only ranged sideways.
The consolidation chipped away at May’s “lower prior highs” – only the lowest of those tests offered any support to last week’s break. I don’t consider those tests to be “higher prior lows” since they had a purpose (unlike May’s highs). So, I don’t consider Thursday and Friday’s highs as having chipped away at their resistance. That said, a gap above Friday’s high would be credible for extending higher.
This second chart addresses the possibility for extending higher. We knew sellers had lost traction since Wednesday’s close failed to break under Tuesday’s prior low (green circles) despite probing it intraday. The near-term bullish opinion didn’t mean buyers had regained control, and any gains would be thanks to weak sellers, not because of strong buyers. In fact, buyers failed two opportunities to gain traction from closing above Monday’s prior low (circled red) despite probing it intraday.
Having failed to retake control peaceably, buyers can gain traction only by force – by rejecting their weaker action with a gap above Friday’s high.
The third chart shows why not immediately resolving the situation would be unlikely to resolve up or down before Monday’s close – if resolved Monday, at all. The rally from Wednesday’s low (red uptrending support) was broken Friday morning and held as resistance Friday afternoon (blue circles). A gap above the trendline would reject Friday’s break under it. Meanwhile, the interim low touched the trendline’s last test (dotted red line), requiring sellers to reject the reaction’s bounce by gapping down.
Essentially, sellers have upset the uptrend’s status quo by breaking it, but they’ve left a vacuum by touching the uptrend’s prior low without closing under it. The market doesn’t like vacuums. If sellers don’t exploit it the trendline break, then the market will suck in buyers to fill the void.
Indicators and Internals.
Friday afternoon’s session low narrowly avoided its most oversold 3-minute RSI by a single bar. But it was still oversold during the low’s formation, along with 1-minute RSI. That’s difficult to avoid retesting, and its retest would be difficult recovering. The market’s clearest path to breaking free from this lower magnetic attraction is to gap or spike up sharply Monday morning.
Monday’s opportunities.
Notice that the last chart only requires buyers to recover Friday afternoon’s high above 920’00. This is deceptive. Beware of such opening strength that also tests Friday morning’s 923’00 high. Holding its test through the opening sequence would trigger a repeat of Friday morning’s drop, but at a much fast pace. Friday’s lows around 911’00 might limit the day’s decline, but not necessarily the day if attacked early enough, and not the week if attacked at all.
This week’s events are substantial for their gravity more so than their quantity. The econ calendar includes an FOMC interest rate announcement, while the Fed and Bernanke each take center stage at separate hearings. If last week’s weakness was defensive posturing ahead of the events, a bounce up into Wednesday FOMC news would be likely. An interim bounce would not deprecate the damage already done to the chart since May’s highs – damage that is free to expand without any bounce, first. [/pay]