Trading Plan for 9/2
[pay]Pattern notes.
Rule number one of low volume is it can reveal whether “weak hands” are sellers, or buyers. Timing windows are similar, and often the two go hand-in-hand. It’s not about direction – a low volume rally can still be bullish – but about the reaction to a rally, or to a test of resistance or of a prior high.
Thursday’s low-volume rally gapped above the consolidation at Wednesday’s high and extended above the previous Friday’s prior high (each circled on the nearby chart). Any higher and the rally would have signaled its intent to extend 2-3 dozen more points higher. I gave the rally a benefit of the doubt, since it had benefited from low volume and volume wasn’t about to improve.
My only problem with Thursday morning’s surge was its last-minute timing, but then that’s how doomed rallies begin. Friday’s open gapped down to retrace all of Thursday’s late-morning gain (purple arrows). The rally met its doom sooner than I had expected.
Friday’s low filled the gap back to Wednesday’s close, neutralizing its magnetic attraction. Friday’s cash session close was slightly under the prior Friday’s low (yellow highlight) but the futures close was still testing it, so its recovery wasn’t completely rejected. Friday’s drop retraced Thursday’s rally but ended just before it would have rejected it.
The past two weeks’ lows around 1260’00-1263’00 remain likely to be tested, probed and broken. This likelihood would all but disappear if S&Ps recovered Friday’s retracement of Thursday’s breakout. Low participation might allow a short and shallow bounce before resuming the decline. But the clock started ticking when the rally was retraced, and delaying a drop would be bullish. Regardless, buyers don’t begin to gain traction without recovering above 1291’50 through a relevant timing window.
Indicators and Internals.
2-1/2 times more NYSE down volume Friday than up volume produced only 75% more declining issues than advancers. Total volume was unremarkable, which doesn’t prevent rewarding buyers for their relative productivity. But it does require a bounce to fail at least one. Oversold RSI just after the cash session close doesn’t help buyers, either.
Tuesday’s opening setup.
(Parameters can apply to Sunday night’s Globex session, which trades 6:00pm through 11:30am ET Monday. I will update overnight, and again before Tuesday’s open.) Friday’s last-minute low barely managed to fill the gap back to Wednesday’s close. Leaving this unresolved would have left something nearby on the table to reinvigorate selling Sunday night. Its test was brief enough to expect a repeat, so any initial bounce should fail until that is resolved. Meanwhile, with no active reason for extending down, extending down would imply that new or bigger reasons have emerged.[/pay]