Trading Plan for 7/20

[pay]Pattern notes.
Monday’s analysis is Friday’s analysis. Buyers are stretched thinly from Thursday afternoon’s simultaneous break above June 30/July 1’s pivotal and actual highs (outlined in green and red on the chart). Refer back to Friday’s Trading Plan for more on this, if needed. Higher highs above 926’00-928’25 (circled in orange) weren’t rejected Friday, perhaps for the same reason they were produced, at all – option expiration influences.

Since trending wasn’t signaled early Friday, it wasn’t likely to be signaled at all, being an expiration session. And being an expiration session, Friday’s characteristics are likely either to be similar into Monday afternoon, or else diametrically opposite. So, Monday’s session should either duplicate Friday’s sideways ranging, or else trend madly. Regardless, expiration’s influences should become irrelevant by Monday’s last 90 minutes.

The bigger picture.
If expiration’s influence was responsible both for pushing and suspending S&Ps above prior highs, it may as well have been the cause of last week’s unchecked surge. As long as we’re on the topic, why not blame it also for the prior week’s decline.

Actually, expiration may be more responsible for stopping the prior week’s decline, and less so for retracing it. Despite its slope and its size, the surge has only tested July 1’s prior high. Thursday afternoon’s breakout attempt wasn’t confirmed by a higher close Friday. A higher close Monday would still require confirmation Tuesday.

If that sounds familiar, it’s because this same problem afflicted June 1’s breakout attempt above 942’25 (horizontal red dashed line on the chart). Maybe the five-week drop down to 866’00 took only one week to be undone. Holding up above 926’00-928’25 much past Tuesday’s open would suggest a different outcome to the next test of 942’25 – whether the rally were to extend this week, or dip first to “lower prior highs” (LPH on the chart) around 902’00.

Rallying out of this three-month range would be signaled on a close above 947’50. If that’s not rejected from 958’50 (+/- 2 points), then 981’00 and 1015’00 would be targeted. Regardless of the eventual target, the move would be sponsored by speculative weak hands. So, any higher highs should mirror last week’s slope. An immediate drop Monday could still recover to resume the rally, but the bigger picture must still answer one important question: Whether last week’s noise was sellers refueling, or buyers just getting warmed up.

Indicators and Internals.
Friday’s last relative lows printed during the last half-hour. RSIs were simultaneously oversold during the low. A last half-hour print is not very reliable, and downright misleading on a Friday, let alone during expiration. That is, Friday afternoon’s low doesn’t necessarily require being retested Monday, but a lot of selling accompanied it. RSIs were overbought at the afternoon’s high, but had already started deteriorating. Although neither setup is predictive in its own right, it does make a reversal likelier from testing one end of Friday afternoon’s range.

Monday’s opportunities.
Gapping open either above last week’s ~941’00 high or under 931’00-932’00 would be likely to extend 4-6 points in that direction before correcting. That is, if the gap’s sponsorship is credible. Testing either end of the range less forcefully would more likely be overwhelmed by the attraction back into Friday’s range. Repeating Friday’s sideways ranging Monday probably won’t be as narrow, so probably worth waiting for one end of the range or the other to be tested. [/pay]