Stock Prices Continue to Slide

Good morning! The market continued its downward spiral on Monday to kick off the new week with a 55.2 point loss (-0.4%) in the Dow Jones Industrial Average ($DJI), a 14.52 point loss (-1%) in the S&P 500 ($SPX), and a 43.81 point loss (-1.7%) in the tech-heavy Nasdaq Composite ($COMPX). On a positive note, the U.S. dollar managed to post some gains on Monday after hitting record lows against the euro only a few days prior. This resulted in falling prices in gold. The front month contract on gold futures fell $27.00 to $807.70 an ounce. Crude-oil futures, which rallied into, but could not break the $100/barrel mark last week, closed lower as well. They lost $1.70/barrel and ended the session at $94.62.

In securities, ETrade Financial Corp. (ETFC) was the largest percentage loser. It fell by 58.7% (-$5.04) to close at $3.55 after announcing that it was the target of an informal inquiry by the Securities and Exchange Commission regarding its loan on security portfolios. They also stepped back their earnings forecast.

Although not quite close to the percentage shed by ETFC, another top loser was Apple Inc. (AAPL), which has been massacred in the last couple of trading days. After nearly hitting $200 a week ago, AAPL has lost nearly 1/4 of its value in the last 4 sessions. It went from highs of $192.68 on Wednesday to a low of $150.63 on Monday and closed at $153.76. It still has room for more downside as well as it tests the $140-$150 price support zone more securely.

On the opposite side, the financial sectors continued to experience a bit of a reprieve from the recent selling. These include banking and broker/dealers. The moves were not extreme, however, and most still turned over off intraday highs, giving back a lot of their gains before the close even though they still managed to hold onto some of those gains. Goldman Sachs (GS) rose $3.38/share to close at $214.71. Citigroup Inc. (C) rose $0.47/share and closed at $35.06.



In yesterday's commentary I laid out two scenarios for the market on Monday. On the one hand, the indices were coming into some initial support, particularly the S&Ps and Dow. The intraday time frames, however, were still favoring further selling and the Nasdaq had a lot of room to keep heading lower. The two possibilities I laid out were hence as follows:"...another gap down, followed by a strong bounce and then slower selling into the afternoon would make it easier for the market to hold the current support zone and turn higher. On the other hand, an even open or even a gap higher into the open, followed by slower upside in the morning can more easily be followed by more downside."

Given that the market opened within a few ticks of Friday's close, the stage was set for scenario number two. Within a few minutes of the opening bell the market began to pull higher, but the indices were still feeling the pressure of the stronger-than-average selloff into Friday's close, making any rapid recovery difficult. A retest of the lows zone into 10:15 ET helped slow the downside momentum a little bit, leading to another move off the lows. The selling was still on the stronger side, however, so this helped keep the buyers in check and the momentum on the move higher was on the slow side overall. This confirmed the expectations brought about by an even opening price in the indices and continued to create favor for another round of selling into the afternoon.



The morning's upside first began to turn around off the 11:15 ET reversal period highs. The market then corrected into the 12:00 ET reversal period. After hitting support, the indices began to show some greater divergence. The Nasdaq had a tough time letting go of the support zone, while the Dow managed to move into new highs intraday. Resistance held as the Dow hit Friday morning's highs. The volume had been much lighter on this upside move, displaying a lack of conviction on the part of the bulls.



By 13:00 ET the market was again heading back into the morning's lows. The Nasdaq hit them first at that 13:00 ET reversal period and a small correction into the 5 minute 20 sma resistance led to even stronger downside. An extremely sloppy bear flag on the 15 minute charts came next, but since the market rounded off somewhat at the start of this flag, unless a trader had already been looking out for further selling, the pop higher into 14:30 ET could have been a bit deceptive. As that 15 minute 20 sma and previous 5 minute highs and lows hit for resistance, however, the sellers returned in full force. The market fell sharply in the final hour of trading, leading to the closing bell ringing as the market was in the process of making new intraday lows.

Since the close, the index futures have been gradually making their way higher. There is still plenty of time before the open for this slow climb to reverse, but this just goes towards our expectations that the daily selling would begin to slow as compared to the initial selloff last week and that we will begin to see more overlap from one day to the next even on new daily lows. Use a great deal of extra caution right now since the increased volatility in the indices will continue to make it difficult to keep stops as tight as usual. To compensate, I'd recommend sticking to the larger intraday time frames for identifying support and resistance and only taking positions which favor those larger price levels as opposed to merely focusing on smaller time frames such as a 5 minute chart for a setup. These smaller time frames can still be used for timing though.



Online Trading Expo in Las Vegas

I will be out of town attending the Online Trading Expo in Las Vegas later this week, so I will not be writing this column from Wednesday night through Monday night. I return home on Monday, so the column will resume on Tuesday evening. For those of you attending, I'll be speaking for the expo at 8 a.m. Vegas time on Sunday and for Real Tick at 10:15 a.m. Sunday. I hope to see you there!