Trading Plan for 8/10

[pay]Pattern notes.
Friday’s open gapped up 10 points to test 1005’00. That’s where the two prior days had peaked. Despite rallying intraday to 1015’00, that’s also where Friday nearly closed. Seems like a relevant area.

The actual close was above the 1005’00 prior highs. Does that qualify as a breakout? Q: What do you call a doctor that graduates last from medical school? A: Doctor. By this standard, Friday’s close was a breakout, barely.

Anyway, breakouts require confirmation by closing higher the next day. The prior week’s breakout attempt wasn’t confirmed the following day, and the next four sessions’ higher highs kept retracing back into the prior week’s range. That sequence still extended higher, eventually. So if Friday’s breakout was valid, then Monday shouldn’t hesitate extending higher and closing higher.

Note that these are two separate parameters: extending higher initially doesn’t necessarily mean closing higher, or even positive. If Monday’s open isn’t extending Friday afternoon’s drop, then it’s probably because buyers are starting out strongly. An upleg here would be steep and fast-paced, and possession is nine-tenths of the law, so an opening surge would get a benefit of the doubt, until technicals deteriorate or a pullback pulls back too far. Which is a good segue into this week’s:

The bigger picture.
The extended target above 981’00 is 1015’00. It is the highest extended target of all prior patterns. To extend higher here would not be to extend higher, but to start an entirely new rally leg. Its targets would not be extended products of prior patterns, but of bigger formations determined by a confirmed breakout. The 1015’00 area also represents a retracement back to the resistance of another prior high – a 38.2% retracement of the decline (see nearby chart).

Meanwhile, the past week has been forming a setup last seen at June’s top. Multiple consecutive days spent ranging sideways, probing higher highs intraday, but never producing a breakout close. The clearest correlation is June 10’s resemblance to last Thursday’s opening surge that immediately reversed down to the range’s lows intraday.

June 10 resembled Thursday also because of their next day’s reactions. June 11 probed June 10’s brief high, and still reversed back down into the range. Similarly, Friday also probed the prior day’s high. Of course, Friday went on to exceed the prior range, and then stayed there. The difference is irrelevant.

The nearby chart of June’s top identifies its counterparts to the earlier chart showing last week’s ranging. Each chart’s green circle is the first day’s brief opening surge, and circled in red is the next day’s closing drop. June’s second day barely probes the green circle’s high, but last week’s second day probe sharply higher, and each green box shows why: June’s first day recovered much of its morning loss, while Thursday left more buying pressure unrealized and still in its potential form to fuel Friday’s open. The second afternoon’s drops (circled red) fell proportionately, which may be difficult to discern since Friday afternoon’s was supported by prior highs.

An exact match in setups doesn’t necessarily resolve similarly. And a similar resolution doesn’t require the exact same setup. But some properties of the setup require a specific outcome for a specific direction, or else a different outcome would resolve in the opposite direction. June’s instance of this setup didn’t happen to being violently – it produced a major decline because it began violently.

Immediately duplicating Friday’s rally to another new high probably takes off the table a violent resolution down. There’s still potential, so long as Friday’s late dip also repeated to prevent buyers from gaining traction. Meanwhile, dropping violently, immediately, extending down throughout the day – it still wouldn’t turn momentum down. Momentum won’t turn down until this rally does the one thing it has avoided since July’s low by closing under a prior low. Currently, that is 993’00-994’00.

Indicators and Internals.
RSIs were making lower overbought highs during Friday afternoon’s prior high. This non-confirmation wasn’t quite a negative divergence. Technicals continued deteriorating into lower lows along with price into the close. Nevertheless, there is no requirement to trade lower or higher left open from the intraday range.

Monday’s opportunities.
The news flow takes a break as the week gets underway. Absent any weekend developments that might influence price action, Monday’s open can be almost a pristine reaction to Friday’s retracement from session highs. The econ calendar heats up Tuesday, not the least of which is FOMC’s meeting. For now, Monday’s opening action is likely to reveal whether it is buyers or sellers that are in charge.[/pay]