Trading Plan for 8/3

[pay]Pattern notes.
Thursday’s late sell-off developed entirely during the noon hour. This left open the possibility of it having been an anomaly. The odds of this were low since we knew since 10:30 that the rally’s momentum had already peaked. Nevertheless, immediately recovering Thursday’s last-hour dive would have invalidated it. The rally would have been validated by default.

Oh, well. The late drop’s 990’00 origin wasn’t just unrecovered, it was tested 2-3 times intraday Friday. The level’s relevance Thursday confirmed that Friday’s drop there wasn’t arbitrary. The inability to recover 990’00 included repeated rejection from there back down to session lows, back down to 981’00. This is not chipping away at resistance, but chipping away at support.

As for 981’00, the last upleg’s target, Friday’s session didn’t close above it any more than did Thursday. Thursday’s close was still in the process of testing it, and so Friday’s closed within ticks of touching it. Closing firmly above it would have decleared the rally’s next target in play at 1015’00. Quickly retracing its first recovery attempt could have mounted another effort. Hanging out at 981’00 – more so, failing further efforts to extend higher – only expends buying pressure to help establish a ceiling.

Friday’s session didn’t probe prior highs, so it is not “ineffectual optimism.” The session also did not range in negative territory, so it is not “ineffectual pessimism.” Those days were last week, when buyers indicated they had run out of steam, while sellers indicated they weren’t biting at then-current levels. A test of last week’s range between 968’50-976’50 is likely regardless of whether its test launches another rally effort or simply gives way into a decline.

The hesitation could still be absorbed and resolved, and the rally resumed. Buyers could still be stretched more thinly by extending higher first Monday, without initially pulling back as just described. The base launching such an upleg hasn’t attracted durable buyers, so the extended gain (i.e. to 1015’00) would be expected to retrace entirely. A dip into 968’50-976’50 could launch an upleg that has more durability. The rally must negotiate these challenges, and these challenges aren’t often negotiated successfully.

Indicators and Internals.
RSIs never became oversold during Thursday’s last half-hour drop from 991’00 to 982’00. So RSI never diverged positively into the lower lows. In fact, 3-minute RSI continued deteriorating throughout, into the closing tick. Technicals suggest the bearishness will persist through the weekend, and the selling will continue through Monday’s open. RSI’s last relative high occurred while a bounce was testing 986’00, so a gap back above 986’00 would help to rob sellers of their traction.

Monday’s opportunities.
If the selling does resume, it is likely to resume Sunday night for a gap down Monday. In that case, I would expect the 976’50 area to serve more as resistance to bounces, and less likely to stop or slow an opening drop. The least likely scenario would resume the rally, but it would be credible if begun forcefully, immediately recovering above Friday’s 990’00 highs.

There is a template for the pattern that would expect relatively narrow ranging to extend throughout the day, so that would be likely if the open isn’t budging. The template will be under attack: Motor Vehicle sales are released throughout the morning, while two econ reports are due 30 minutes after the cash session open.[/pay]