Trading Plan for 7/2
[pay]Pattern notes.
Tuesday’s lows probed prior intraday lows and recovered to close back above them. This single innocuous statement might be the most powerful bullish factor inviting a rally. If buyers are not obviously in control at Wednesday’s open, then the statement’s threat to sellers might be only that, a threat. The year’s lows still require being tested, if not also broken by a new downleg. But Tuesday’s recovery from probing prior lows has opened the door to a detour from new lows, if that detour is taken right away.
The close could have been more convincing by trading above ESu 1283’00 long before the session’s last several minutes, instead of only firming. A gap up to or through Monday’s late-afternoon 1289’00 high is likely in a bullish scenario, and not simply a flat open that gradually trends higher. Sellers must force Wednesday’s open to gap under 1279’00 to reject Tuesday’s last-minute firming.
The rally potential isn’t so much a function of what buyers are doing right, because it’s not as if any meaningful resistance has been recovered, let alone attacked. And it’s not even about what sellers are doing wrong, at least not initially, because major support levels are being challenged. The bullish potential is due to sellers not being able to maintain the early chart damage, repairing the damage with a recovery that opens the door for buyers to walk through.
Indicators and Internals.
Part of my expectation for Tuesday’s sell-off was based on Monday’s internal negative divergence. Well, Déjà vu. Wednesday’s NYSE down volume was only slightly ahead of up volume, but the spread between declining and advancing issues was not narrow. Wednesday’s market is obligated to reward Tuesday’s sellers for their relative productivity. The obligation is rendered moot by gapping above the session high, which shouldn’t be too difficult since Tuesday’s close was pretty much its high. RSI diverged negatively as S&Ps gained further after the close. These aren’t signals, but these are problems that buyers need to absorb.
Wednesday’s opening setup.
The econ calendar offers several glimpses into what Thursday’s Employment Situation report might look like. My own assumption is that it might be stronger since it won’t include the anomaly of students hitting the street for summer jobs, freeing the Fed’s hands to hike rates, lift the $USD and hurt commodities. This scenario is more bullish than expecting quarterly earnings lift stocks. But volatility should start evaporating again into the afternoon ahead of Thursday’s report, which might then be the week’s last bit of fireworks.[/pay]