Trading Plan for 8/29
[pay]Pattern notes.
Thursday’s session-long rally went a long way…17 handles, to be exact, peaking at 1300’00… 24-1/2 points would also be exact, which is the gain from overnight lows… Or 12 points, the gain since gapping up at the cash session’s open. Any one of those would be correct, and every one of those would miss the point. Thursday’s rally went a long way to requiring new relative highs up to 1326’00 before ultimately returning to last week’s lows to retest, probe and break them.
The difference between up and down can be reduced to a day or two. Volume normally evaporates around three-day holiday weekends. There’s fewer participants, making it difficult to generate sponsorship for reversing a trend. Despite S&Ps trading softer during the past several weeks, the trend had not yet reversed down by closing under the 1260’00 area. The corrective bounce found new life by waiting out sellers.
The same tactic “powered” the last leg of a corrective bounce into last December’s highs, and also this year’s larger rally off of March’s lows. Volume’s pace has been declining steadily for at least a month while S&Ps have ranged widely – sideways, but widely. Thursday’s gap up and session-long rally seemed like the work of broad buying efforts, but it was due more to the lack of selling efforts.
Thursday’s steadily rising channel makes higher highs likely to test 1307’00 Friday. Any higher high that starts not by gapping up, and ends in negative territory, would go a long way to undermining the potential to 1326’00. Buyers will have milked their low-volume sob story dry. Otherwise, closing above the 1307’00 area would signal the balloon was still inflating.
Indicators and Internals.
The ratio between NYSE advancing and declining issues was 4:1, and not much higher between up and down volume. Relatively low volume spares the market from any obligation to reward sellers for their relative productivity. RSI and MACD spent the day magnetized to their respective neutral readings, reflecting the rally’s controlled personality, or at least the lack of any opposition.
Friday’s opening setup.
Pullbacks on the way to higher highs should be short and shallow, regardless of whether the higher high is short-lived. My pre-close preference was 1297’00, just a couple of points under Thursday’s close. DELL’s big earnings miss put this pullback limit under pressure, but it has so far held. The pressure would increase exponentially if a break were maintained under 1295’00. This would simultaneously break under Thursday’s last relative low, and its last three relative highs.
Seems like a lot of buying effort being expended already just to look tough in the face of DELL’s surprise. Stiff upper lips will be needed during the morning’s litter of econ reports at 8:30, 9:45 and 10:00. But the bond market’s early close and the holiday weekend could make the afternoon a desolate place.[/pay]