Commodities Soar While Broader Market Plummets

(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)

When the market closed on Friday the indices were poised for a longer correction off the day's highs. Due to the momentum on the upside from Thursday afternoon into Friday's open, the bias was set for a slower correction off the highs than the rally itself. This was little comfort, however, given that even a modestly more gradual correction would still be quite a bit stronger than the market's average. The latest market whipsaw had help from uncertainty over a $700 billion bail-out plan to alleviate the burden of bad assets in the financial sector and keep a larger economic depression at bay.

Nasdaq Composite ($COMPX)


Oil futures jumped a whopping 15.7% and closed at $120.92 a barrel for the October delivery. November crude closed at $109.37. Gold and gold-related stocks also rose sharply. Gold futures closed at $909 an ounce, up $44.30 from Friday. Closely related was the falling dollar. In Monday's session the dollar fell 2% against the euro, which amounted to its largest single day drop ever. It seemed that there was speculation all around that the government's plans to block a larger economic meltdown may not be enough.

Dow Jones Industrial Average ($DJI)


The market held a steady downtrend throughout the day on Monday. Soon after the opening bell rang the first short setup triggered in the indices when the channel on the 5 minute chart into Friday's close broke lower. A series of bear flags followed into the afternoon. The market hit its first major support around 13:35-13:40 ET when price support from the previous afternoon hit. This was also the third low intraday on a 5 minute time frame, which can lead into a larger momentum reversal. On a larger 60 minute chart, however, the indices had not quite corrected enough off last week's highs to sustain a large rally. Although the market made an attempt, the move failed to confirm and another short setup triggered out of 14:30 ET.

Although somewhat difficult to see on the 5 minute charts, both the S&P 500 and Dow Jones Industrial Average formed a momentum reversal short between the 13:35 lows and the 14:30 highs with three small waves of buying within the larger bear flag. A smaller continuation pattern followed with congestion into about 15:15 ET and then the indices dropped sharply into the closing bell.

S&P 500 ($SPX)


By the end of the day, the Dow Jones Ind. Ave ($DJI) had fallen 373 points, or 3.3% and closed at 11,016... back at the 11k zone. The S&P 500 ($SPX) lost 48 points, or 3.8%, and closed at 1,207. The Nasdaq Composite ($COMPX) fell 95 points, or a staggering 4.2%, to close at 2,186. The focus on Tuesday will likely remain on Treasury Secretary Hank Paulson's rescue attempt and what news we may see coming out of Congress. Although I risk sounding like a broken record at the moment, use utmost care and consideration when trading in the current market environment. This is particularly true of those focusing upon the forex, commodities and futures markets since the added volatility more greatly affects risk management prospects for the smaller Average Joe day and swingtrader.

Those trading stocks still have more possibilities in that they can more easily just adjust their share size lower to keep their risk levels more comparable to what they were in the past, but they are still going to be subject to greater odds of having market stop orders and the like getting taken out only to have the position then follow through as anticipated! I have seen this become quite common in recent weeks and is likely to continued for the near futures until this period of news-driven markets has passed.