Trading Plan for 6/27

[pay]Pattern notes.
S&Ps fell to new session low into Thursday’s close, despite the pessimistic break from an Expanding Triangle just one hour earlier. That pessimistic break had bounced 6 points to thoroughly test the ESu 1293’00 area as resistance. The 8-point drop from there came within 5 points of the decline’s big 1280’00 target.

An early drop Friday wouldn’t increase the likelihood for recovering – a bottom formed from washed-out sellers can look very similar to a melt-down’s beginning stages. Optimism has been preventing the market from forming a bottom for weeks, so the chances for a bottom become greater when pessimism rears its head. My last blog entry described the Expanding Triangle’s break (a chart has been added). Another example would be Thursday’s relentless decline as fearful sellers try to avoid a perceived rush on Friday, only to find Friday that everyone sold on Thursday.

None of which is a buy signal, a bottoming signal or a rally signal. But they’re all necessary elements for ending a decline so that a bottom can form and a rally can begin. This leg’s target area is fast approaching, and the market should either bounce aggressively from its test, or else accelerate the decline’s pace to something far steeper and deeper.

Indicators and Internals.
Internal spreads were understandably wide – 5.4 declining issues per each advancer, on 9.7 time more down volume than up. Buyers were more productive, but that starts to become irrelevant when spreads become so wide. Even if there were an immediate bounce, Thursday’s lows should be probed.

Friday’s opening setup.
S&Ps came within 3 points of the 1280’00 target after Thursday’s close. Testing it early enough and then also quickly recovering – perhaps from the 1270’s – would be a clear signal that sellers weren’t going to be a factor again until next week. Thursday’s post-close price action left a gap back to the cash session, and a lower-open Friday would leave another. One econ report pre-open and another 25-30 minutes after the open could play “good cop / bad cop” in attracting buyers back in. Or they might play “bad cop / worse cop” in attracting new sellers for an intraday drop that outweighs Thursday’s.[/pay]