Trading Plan for 7/28

Knock, knock. Who’s there?… Margin. Hello?… Three consecutive sessions of “ineffectual pessimism” had created fertile ground to launch a rally Wednesday. The alternative would not be pretty, and it was not. [pay]

Pattern points… (Setups and technicals)
Wednesday’s cash session close equated to 1300.00. It was just last Monday that 1300.00 was recovered after testing the decline’s 1292.25 target. And closing above 1300.00 had merited holding long through the close, which extended up to 1324.00 at the next day’s high.

The more things change…

Now 1300.00 is being tested as support after dropping 28 points intraday. Futures extended down to 1298.00 (allegedly on a multi-billion dollar sale of S&P futures). The post-close excess pessimism offers some buffer to absorb immediate selling pressure. So does oversold 1-minute RSI, in the context of 3-minute RSI diverging positively.

Probing lower lows overnight could recover before Thursday’s open, but not without creating unfinished business below. Regardless, probing lower lows overnight need not recover, at all. More on that later…

Just closing under 1309.50 now indicates that last week’s rally was only a correction. And the correction is ending. The close above 1323.50 that had created potential into the 1370’s? No second consecutive higher close ever confirmed its breakout, and now one never will. Last week’s rally has been retraced too deeply to be only a correction, so it must have attracted strong-handed sponsorship for a new downleg.

I don’t like several things about that. 1. Last Friday’s 1347.75 pre-open high was never retested intraday. 2. The gap back to Friday’s 1341.00 close was never filled (despite Monday’s big intraday recovery having peaked pessimistically short). And 3. three consecutive sessions of “ineffectual pessimism” gained traction.

Wednesday’s drop may have gotten ahead of itself. A bounce could test 1309.50 as resistance, or closing back above it could retest 1323.50. But any bounce is just a temporary correction. No bounce is required – Thursday’s open could gap down sharply and extend down intraday.

What’s Next… (Outlook and opportunities)
Extending down at all Thursday morning should gap down. So, not gapping down at all should produce a bounce. A bounce could peak intraday upon testing 1310.00, or extend up to 1323.50 into Friday morning. But the next major objective under 1291.00 would be 1277.00-1278.00.[/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.