Trading Plan for 7/27

[pay]Pattern notes.
Friday’s session offered a great example of sponsorship, and the lack thereof. Of the three main lessons, the middle one chronologically had the most relevance. This was the extended narrow consolidation at Thursday night’s lows.

Extended narrow consolidations aren’t very rare. Among so many such setups there is a great likelihood that the first trending attempt will fail. The narrower consolidations have more density, and extended consolidations have more mass. The two characteristics combined create greater gravitational pull. Indeed, the more likely for trending attempts to fail repeatedly.

Repeated attempts to trend away from Thursday night’s consolidation (circled black) each retraced back into the consolidation to varying degrees (highlighted green). Sellers never had enough sponsorship to break through the consolidation Friday morning. New sponsorship is most difficult to attract on Fridays, which is why a trading range was the expected alternative to not breaking lower early enough.

Thursday evening’s sellers also lacked sponsorship for extending the initial drop either. This was chronologically the first example. Thursday’s late-afternoon pattern had already predicted – regardless of whether price reacted up or down – to expect a rally off of the post-close earnings reaction. Two factors made a rally likelier to have greater sponsorship following the afternoon’s relatively narrow top (circled green). First, because sellers acted too late to exploit buyers’ hesitation. Second, because that action was too dramatic relative to the top’s narrow range.

Notice how this reflection of excess pessimism didn’t stop a negative reaction, it only doomed that reaction to being retraced. In fact, the overnight parameter was back above 966’25 would target “higher prior lows” at 971’00. The delayed reaction didn’t change the target, it only exacerbated the target’s test. The top’s 38.2% retracement was met nearly 3 points above 971’00.

Which segues into the third example of sponsorship, or lack thereof. Without a sell-off underway early, the trading range was on-track to persist through the close. A session’s most malleable timing window is its closing minutes, most of all on Fridays. Some setups harness this unpredictability into predictability. The afternoon’s two-hour consolidation made price action into the close unlikely to remain in the narrow range. If the trading range’s influence wouldn’t push price back down, then the market would suck in buyers to fill the void. Sellers lacked sponsorship, and prices surged.

Bigger Picture Update
Last week’s extension of the rally has put into play the “Rubber Band” setup. Closing prices have risen with only 1-2 exceptions among ten consecutive sessions. Picture a rubber band being stretched to its breaking point, and then being stretched more. The force being applied to perform the stretching doesn’t change, but it suddenly becomes more productive, unencumbered by the rubber band’s resistance.

If Monday’s session doesn’t surge impressively, then it’s probably because the rubber band’s integrity has been maintained. In this case, it could be obvious Monday or Tuesday that the rubber band is catapulting the rally’s force back to its origin and lower. This is the setup’s likelier resolution in an uptrend, with the caveat that resolving up tends to resolve very up, very quickly.

Thanks to Friday morning’s repeated chipping away at support, the 963’00-965’00 area shouldn’t offer much support if tested again. Thursday morning’s 949’00 low would be targeted next, which was itself a retest and also unlikely to offer much support if retested again. This would turn Thursday’s breakout attempt into pure ballast, already having failed to be confirmed Friday (stalling new highs until the last 15 minutes is too late).

The rally may be living on borrowed time. But it can still spend that loan wisely by extending higher early and often on Monday or Tuesday. A mild pullback on one of those days or the other could be absorbed. If sellers aren’t clearly retaking control by Wednesday’s open, then price should already be substantially higher than at last week’s close.

Indicators and Internals.
RSIs were last oversold at Friday morning’s second to last low (the 964’00 pivotal low). Sellers haven’t been much of a factor since then, while buyers took both 1-minute and 3-minute RSIs to overbought both into and out of the cash session close. Friday’s last 15 minutes are the most malleable, and unable to offer confirmation of a prior day’s breakout, so their overbought readings don’t require a retest.

Monday’s opportunities.
The Friday Factor setup can provide interesting guidance when its first and last 15 minutes trend in the same direction. Often Monday’s first 15 minutes will perform similarly from the opening tick. Notice this doesn’t mean Monday’s open will gain, only that it is likely to gain briefly from the opening tick, whether gapping up or down. Considering the Bigger Picture’s “Rubber Band” context, I would be inclined to buy a gap up, and to slowly short a gap down.

A gap down that bounces back up to Friday’s 979’00 close should then either sell-off sharply, or else surge higher. The biggest sell signal wouldn’t be generated much above 973’00. That’s where Friday’s last two hours created another mass whose gravitational pull will be influential if its orbit is re-entered. New Home Sales 10:00 will keep alive its potential retest regardless of the opening ticks.[/pay]