Trading Plan for 7/14

[pay]Pattern notes.
Monday’s pre-open recovery absorbed an overnight drop, and the intraday rally also required absorbing a post-open drop. The drop bottomed 2 ticks short of the morning’s 870’75 bias-down signal (circled red on the first chart), put into play by the no-bias environment having failed a test of the 879’00 bias-up signal. The pullback was predicted by the pre-open pattern (highlighted yellow), although it normally continues reversing down.

I can’t assume that the bias-down signal’s test was fulfilled, despite the balance of the session having rallied 26 points. But I can assume the intraday rally was excessively optimistic, and not just for having begun 2 ticks short of the low’s target.

Other optimistic indications include the timing of the rally was inappropriate, originating during a no-bias environment. Two brief consolidations along the way up (defined in green) were short and shallow, barely touching a relevant support (if at all) before surging higher. Even the afternoon’s channel (defined by dashed lines) reflected optimism by its upward slant.

But the optimism has yet to be proved ineffectual. The afternoon’s no-bias environment did hold repeated tests of the 893’25 bias-up signal, ultimately closing above it. The lower chart depicts the past week, and Monday’s test of last Monday’s high, filling the outstanding gap back to its close. This was already a test of the prior week’s close (both extended levels highlighted yellow), so there wasn’t a requirement to retest this area again.

The gap’s test at 896’00 held on a closing basis, so buyers might have expended their last available energy. The lower level at 893’00 must be rejected through Tuesday’s open to confirm that buyers have lost traction. Back under 889’25-890’25 would signal that sellers had gained traction in their place, targeting a complete retracement of the rally from Sunday night’s 865’50 low.

Rallies can extend on nothing more than hope. It’s all that’s fueling Monday’s gains, but sometimes that’s enough. For awhile, at least. Not rejecting the highlighted 896’00 resistance could next target 907’00. The resolution would still likely be down.

Indicators and Internals.
RSIs were simultaneously oversold at Monday morning’s pullback low (circled red/green in the top chart). Sellers capable of producing this condition aren’t typically late-stage sellers. Buyers attracted to this condition aren’t typically durable buyers. So, rallies begun from this condition are normally retraced entirely, and ulitmately rejected by a downleg. The simultaneous negative divergence at Monday’s last-minute high came after position-squaring’s influence subsided, so extending the rally might depend largely upon absorbing any initial pullback.

Tuesday’s opportunities.
Lots of metrics will be available in the morning through various retail sales data. PPI is the day’s highest profile report. Monday afternoon’s late surge had potential to 899’50, and it was a little surprising to not make it. An early test Tuesday that quickly fails could give sellers traction, since buyers lost traction by slipping under 896’50 into Monday’s close. A recovery maintained above 899’50 would allow buyers to regain traction. [/pay]