Trading Plan for 8/18

[pay]Pattern notes.
Monday’s open maintained a gap under Friday afternoon’s 994’00 low to form a session-long decline setup. Actually, the open’s gap down at 984’25 was 10 points under the session-long decline setup, so much of the selling pressure was already expended. But the setup was fulfilled anyway: all bounces failed, buyers gained no traction, and the session low printed during the last hour. In fact, the setup’s only optional characteristic was also fulfilled when the actual 975’50 low printed among the session’s final ticks.

A successful session-long decline setup often extends further the following day unless rejected at the following open. A rejection in this setup would gap up above Monday afternoon’s highs, through 983’50, triggering at least near-term corrective bounce targeting the low 990’s.

But a bounce or recovery is the exception. Monday’s last-minute 975’50 low  printed after the cash session close, as did its bounce back up to 979’25, too late to reflect substantial selling pressure or to suggest buyers gobbled it up. The afternoon’s fresh session lows waited so long, and they stopped just short of filling the gap back to July 29’s close, each a reflecting optimism, when a bottom needs pessimism. Having barely probed the 976’00 upper-end of July 27-29’s range, the range’s 966’00 lower-end is likely to be tested, too.

This week being expiration, new trending can extend much further than normal ranging. Trending can also stop prematurely. Extended selling would be signaled by gapping down through 966’00, next targeting 952’50-954’50. The drop’s premature end would probably outlast expiration by recovering the 990’s.

Indicators and Internals.
RSIs were eerily subdued through Monday afternoon. That didn’t prevent probing lower lows, but sellers reserved their energy. Two earlier positive divergences failed to avoid probing session lows, but there wasn’t a third to reflect much bigger selling pressure coming down the pipeline. It’s still possible, and sizable selling pressure would still be respected, but a corrective bounce can’t yet be discounted.

Tuesday’s opportunities.
A steady flow of econ reports provide an interesting obstacle course to navigate. Their ultimate reaction – either bouncing or extending down further – should reflect whether the market has grown wary of news items. Getting past the news while holding a test of prior lows would help to launch a mid-week corrective bounce. Otherwise, without rallying early, more destruction is likely. [/pay]