Trading Plan for 7/26

[pay]About that close (How the prior session ended)
Thursday’s close above 1085.00 officially signaled a 10-15 point probe above 1100.00 underway, but I noted that it was done very grudgingly. Closing above 1093.00 officially confirmed, but it wasn’t done any more certainly.

Friday afternoon’s 1095.50 bias-up signal wasn’t tripped in time to formally trigger. It still deserved a benefit of the doubt for behaving as if it did, despite being required to fail. So its 1100.75 target was tested, and the last half-hour eventually dipped to 1093.50. But the dip came too late to be credible, so it was recovered to fresh highs at 1101.50.

Actually, the cash session recovered to only 1099.00. That was essentially a 61.8% retracement back into the late-afternoon’s consolidation. A 61.8% retracement is natural resistance, and the extended futures close doesn’t require a retest. A more serious downleg is free to begin immediately, or else 1108.50 and 1118.00 is now in-play.

Pattern points (And technical influences)
Here’s a “big picture” chart depicting the S&P Cash index. It’s not futures, whose premium for time and volatility can fluctuate. The year’s warning shot across the bow formed an inverted “Pivotal Correction,” sort of a head & shoulders pattern. April’s high ultimately fulfilled the pattern’s 261.8% extension, its maximum calculable target.

The reaction was immediate, which is not unusual. The reaction was dramatic, which is not usual. Regardless, the reaction normally continues through the Pivotal Correction. And upon closing under it, the trend has officially reversed. The reaction did close under the Pivotal Correction, for several consecutive sessions (circled red on the chart). S&P futures probed lower while the cash market was closed during Independence Day.

The trend has reversed down. Nevertheless, price action has bounced. How? First, having secured the trend change, the pattern became free to refuel selling pressure with a bounce. Conveniently, and second, a lot of selling pressure was being satisfied while the trend change was being secured: a big target area was probed at the cash session low, and its lower-end was retested during the holiday trading.

Now the template requires that trending below the Pivotal Correction should measure greater than its recovery leg. If the recovery measured 175 points above Feb 5’s low at SPX 1045.50, then the drop should eventually exceed 175 points below SPX 1045.50. This current bounce seems like its refueling for the entire journey ahead. Actually, the Pivotal Correction’s high (highlighted pink) hasn’t even been probed since the trend changed.

It would be convenient for this bounce to end here. Limiting any fresh highs only to intraday would be helpful, too. Otherwise, closing above the pattern’s upper-end would threaten to give buyers traction. Regardless, there’s room up to SPX 1112.00 and 1121.50 (currently 1108.50 and 1118.00 basis ES). Closing any higher would not negate the trend change, but it would at least extend this year’s ranging.

Bottom line (My underlying premise)
I analyze S&Ps for trending and targets because I’ve found it to be the most predictive index. Other indexes track its direction and timing, but not necessarily its degree. Case in point: NDX (shown in the nearby chart). It has yet to close under its Feb low – the Dow did, before S&Ps. This suggests that speculative optimism was never flushed out. Even if Friday/Monday doesn’t contain the current bounce’s peak, it is still only a corrective bounce. [/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.