Trading Plan For Next Week

As I said in my previous market update post I don't believe I'll do any trading next week. Indices are just acting too choppy and until a new trend establishes it is better to stay on the sidelines. However, a new trend WILL establish sooner or later. As a trend follower I simply have to believe that. So, although I don't expect to do any trading next soon, I still have a trading plan, which is as follows.

First of all, I'm not going to even look at particular stocks until I see any resolution on indices.

Bullish scenario:

• First I'd like to see some sort of a reversal forming. It could be in the form of a hammer, a two-day reversal or any other pattern, this is not so important.
• More important is what follows next. We should see at least a two day rally on strong volume.
• The best next thing would be a low volume down day – a test. Sometimes tests occur, sometimes not. If we get a solid rally I may do some buying without waiting for a test.
• The final component of this »perfect« scenario is a follow through day – a breakout into new short term highs on massive volume. Again, follow through days sometimes happen and sometimes they don't. In any case there should be at least one very high volume up day supported by plenty of high quality names breaking out of solid base patterns.

Let's see how a perfect bearish scenario would look like.

Bearish scenario:

• As I said before I don't believe market will just drop as it is already being oversold. In the first days of next week there should be a weak rally on lower and lower volume – a wedging rally.
• A high volume plunge through the support area could follow. Now, if I see a wedging rally and a swing high on volume increase, I might start opening a few short positions in case if market just cuts through support and never looks up again.
• Anyway, the best shorting opportunities should appear on a weak rally into resistance. Keep in mind that market may »crawl« above or below the green horizontal line for several days before rolling over. Picture below is just an example of a perfect scenario. In any case weak rallies into resistance areas should provide the highest probability short setups.
  

Don't expect that any scenario will reveal itself exactly as I draw on pictures. It won't. This is only a model of expected steps that would confirm bullish or bearish scenario. I may do mid week updates on which scenario may be realizing. I will touch particular stocks when I get a confirmation of bullish or bearish case. There are plenty of candidates for both.

Good luck and be careful with your stocks!