Trading Plan for 8/17

[pay]Pattern notes.
We’re holding our collective breath. News of the country’s sixth largest bank failure greeted the weekend. Educated guess: that’s probably not why Friday’s last half-hour surged 10 points. Another educated guess: The news probably won’t shouldn’t trigger the surge’s retracement. FDIC seizures tend to be seamless (Colonial was scheduled to open Saturday morning after its deposits were sold to BB&T).

Friday’s last hour was vulnerable to a 10-15 point move. Down was likelier than up, but the drop’s 995’00 trigger was only touched and not broken. Its potential remains alive according to the first chart displayed here.

Two similar sessions in the past two weeks alone (highlighted red) were immediately retraced, and then some. Three other sessions during the same time frame (highlighted pink) illustrate generally depressed sessions that decide not to end by surging. Their persistent pessimism got selling pressure out of the way.

Sessions like Friday simply wind-up sellers. This is the case even more so when the buying isn’t productive. Despite the points gained, no relevant level was recovered – no prior high, not positive territory. The buying started too late to be short-covering, so it was not the product of prior sellers exiting. It also started too late to be strong hands buying, so it was not accumulation. Rather, it was weak hands buying, now long with inventory they’ll dump with little provocation onto the market.

Those buyers left nothing on the table, no unfinished business above, as shown in the second chart. The gap back to Thursday’s close need not be filled since Friday’s open retraced its last-minute surge. Friday’s late surge peaked upon retracing a normal 61.8% of the distance back to Thursday’s close. And the surge tested all prior lows that could have been tested from below. An immediate break back under the nearest two or all four – 1002’50 or 998’00, respectively – would put into play a retest of the same lows that were attacked all morning Friday.

The bigger picture. The rally does have a way out, but it would come from the outside and not from anything now inside it. Recall that this rally’s last targets were met at 981’00 and 1015’00. There are no more extended targets. Notice in the first chart above that even Friday’s low overlapped the two-week old session that first met 981’00. Rallying further would be due to new sponsorship having arrived, and it would announce itself by finally launching out of the two-week long range. Anything milder than such obvious price strength could fill the gap back to Thursday’s close.

Indicators and Internals.
Although RSIs made lower highs at Friday morning’s 11:30 price low, both 1-minute and 3-minute were oversold. So the 992’25 is likely to be retested, similar to Thursday’s 998’00 low. Lower quality buyers are attracted to such oversold situations, so their product is likely to fail. RSIs became simultaneously overbought just before the close, too late to be responsible for the next reaction.

Monday’s opportunities.
An opening dive would have a scapegoat to blame, the bank failure news. This can assist in absorbing the shock. If fallout lasts very long past the open’s first 15 minutes of volatility, then sellers’ motives are genuine, and durable. A gap down maintained under the afternoon’s 994’00 low would go so far as to signal a session-long decline. Recovering or gapping up above 1011’00 would be near-term bullish. But a longer-term bullish effect wouldn’t be known from any opening setup.[/pay]