Trading Plan for 7/26

Now, that’s a pullback… Monday’s reaction to the weekend’s ongoing debt debate may have trapped shorts to fuel a bigger rally leg. But if that isn’t obvious early Tuesday, then a deeper pullback is underway. [pay]

Pattern points… (Setups and technicals)
The problem with last week’s rally was its magnetic attraction to resistance. Tuesday and Wednesday’s closes traded out while testing 1323.50 resistance. Thursday and Friday’s closes were still testing 1341.00 resistance.

Holding resistance does not end a rally. But neither does it refuel the rally. That’s what happens when closing lower, after recovering from a test of support. That’s what Monday’s Trading Plan described. And that’s what Monday’s session did.

Plunging overnight, gapping down at the open, and recovering back above 1330.50. All would have been for naught, if the close were in the process of testing resistance. But it was not.

In fact, the recovery peaked less than 1 point short of simply touching 1341.00. That’s pessimism, and that’s what creates a vacuum to help the recovery extend higher overnight. Gapping up sharply would be entirely appropriate for this pattern.

What’s Next… (Outlook and opportunities)
Actually, not gapping up could be bearish. Gapping down Tuesday is the likeliest alternative to gapping up. The econ calendar is heavy, and that’s after getting past two more press conferences planned for Monday night.[/pay]

Look for at least one update overnight or ahead of the Morning Market Tour… My thoughts on the day’s econ calendar are linked here.