Trading Plan for 8/25

[pay]Pattern notes.
The middle of last week’s trading -Tuesday through Thursday – had an opportunity to extend the prior week’s drop in a big way. Several opportunities, actually. The longer the delay, the bigger the void where selling pressure was supposed to appear. The market sucked in sellers at Friday’s open to produce a gap up and some follow-through.

Whether Friday’s opening gain extends higher depends largely upon Monday’s open, and whether it quickly rejects Friday’s gain. The breakout’s chances would have been much better had S&Ps tried and failed one more time to resume the decline. Just firming Friday would have helped a rally’s chances. Instead Friday’s gap up was optimistic. And the optimism was ineffectual because it expended buying pressure without recovering any relevant level.

This is illustrated in the nearby chart. The consolidation off recent highs led to Friday’s gap up, highlighted in red. Friday’s high peaked at the consolidation’s 61.8% retracement. Interestingly, last week’s lows (at the ever-relevant 1260’00 area) retested the earlier consolidation’s last low (also at ~1260’00) so a third test is all but assured to break lower. But a third test isn’t assured if Monday’s open doesn’t hesitate to extend Friday’s gains.

Indicators and Internals.
Volume wasn’t unusually low for a Friday, only for a breakout. The reduced participation may have inhibited the gap up’s follow-through. But the open gapped up nonetheless. This requires another immediate show of strength Monday if Friday’s strength was valid. Otherwise it probably wasn’t.

Monday’s opening setup.
Sellers don’t need to retrace all of Friday’s gain to reject it. But no retracement at all through Monday’s open would suggest S&Ps might print 1303’00 (+/- 3 points) before sellers are able to reject anything again.[/pay]