Trading Plan for 9/8

[pay]Pattern notes.
The last big government bailout triggered a months-long rally. That was Bear Stearns (BSC), which is the natural comparison for this weekend’s news about Fannie (FNM) and Freddie (FRE) conservatorships. That it is also the only comparison doesn’t much matter to me. Fundamentals of the deal don’t inform my technical analysis. And my chart interpretation never acknowledges more than the timing of news, not its substance. The deal points are still of interest to anticipate and understand the sentiment reaction, both knee-jerk and longer-term.

The nearby chart depicts S&P Cash (SPX) price action leading into and out of the BSC rescue. The red bars are Friday before the deal, which fell sharply through the open until testing the prior day’s low (red dashes). The prior day’s low also held an afternoon retest, preventing sellers from gaining any traction. Monday’s reaction opened down sharply again (blue bars, to represent the color everyone’s faces turned while holding their collective breath). The lower low held two tests of Monday’s prior low (blue dashes), which at that point was a new trend low. Despite the lower low, sellers still didn’t gain any traction.

Last week’s price action depicted here was obviously different, and less obviously similar. Selling got underway when the week began Tuesday, and continued through Friday’s open. The pace slowed Wednesday (green bars) and and made no net progress Friday. In the process, Friday did recover its intraday test of July 28’s 1235’00 prior low (red dashes). The next lower low is 1200’50, too deep to expect an intraday round-trip. But a rally would get a big benefit of the doubt if any probe under Friday’s 1216’50 low is recovered to close above the 1235’00 prior low.

Friday’s close nearly recovered above Thursday’s last relative high. It came close enough to succeed, but didn’t. That’s ineffectual optimism, since all the afternoon accomplished was to neutralize the morning’s pent-up oversold buying pressure. Unless something significant develops Sunday night, it appears that Monday’s market will focus less on whether another bailout can spark another rally, and more on how that last rally turned out.

Indicators and Internals.
Advancing issues were essentially flat with decliners Friday, despite at least 50% more NYSE up volume than down volume. This is another form of ineffectual optimism, similar to the price action described above. The only outstanding signal might have been an overbought 3-min RSI. Its last-minute occurrence undermines its relevance, making it barely even likely to be retested, and certainly not required. By the same token, its retest wouldn’t neutralize any meaningful attraction, so its retest alone would not justify selling there.

Monday’s opening setup.
The gap down to Friday’s 1229’00 open wants to be filled. This would have been the case no matter how high Friday’s recovery had closed. Initial optimism Sunday night could probe 1251’00, possibly even 1260’00, and I would happily ride either leg (with a tight stop and short attention span). But a rally at this stage of the pattern would be doomed if born of enthusiasm and excitement. The only bottom to believe is one that has absorbed the worst reaction to news. Unfortunately, I suspect this stage of the pattern will try that route, and fail.[/pay]