Market Rollover Leads to a Strong Day of Buying, but Turns Lower into the Close and Beyond

Market Rollover Leads to a Strong Day of Buying, but Turns Lower into the Close and Beyond

(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.)

The indices were rounding off at lows over the past several days of trade. This can be seen the most easily on a 30-60 minute time frame. It created a bullish bias from the technical side into Thursday's trade. The wild card, of course, has been the constant threat of news. In this case, however, the market saw little to fuel greater concern and was able to embrace the technicals. Later in the session Senator Christopher Dodd offered assurance that Congressional leaders had reached an agreement on the core aspects of a package, estimated at $700 billion, to bail out the financial industry.

Although the details have yet to be disclosed, the Wall Street Journal has reported that some of the key elements of the plan appear to be the infusion of funds in phases, limits on executive pay, the possible rights to the government acquisition of shares in the company's receiving assistance, and strong government oversight.

Nasdaq Composite ($COMPX)


The day's upside kicked off around 4:00 am ET in premarket trade. This broke the upper end of the downtrend channel from the prior two days. The buying resumed at about 8:00 am ET, but pulled back one final time into the open following early morning economic data. Weekly initial jobless claims rose by 32,000 last week to 493,000. According to the Labor Department, this is the highest level in seven years. The number of continuing claims remained steady at 3.54 million at a 5-year high. Meanwhile, the Commerce Department reported that orders of durable goods fell 4.5% in August.

The indices broke higher again into the open after pulling back into support from earlier congestion. The break higher increased in both momentum and duration. The 10:00 ET new home sales data was quite dismal, but did nothing to forestall the rally. Sales in new homes fell by 11.5% in August, the lowest level since January 1991. Sales were down 34.5% last month as compared to a year earlier.

Dow Jones Industrial Average ($DJI)


When the 10:15 ET correction period hit, the S&P 500 and Dow Jones Industrial Average were testing Tuesday afternoon's highs, while the Nasdaq was hitting Tuesday's morning highs. These are strong market resistance levels given their occurrence on a 15 minute time frame. The momentum intraday, however, helped sustain the move. In order for such a rally to correct, the momentum often needs to shift in some way or another. The reversal off lows on a 60 minute time frame heading into Thursday morning is a great example of this. Intraday on Thursday was a smaller version of the same concept. The indices held the 5 minute 20 simple period moving average and slowly continued to climb higher into mid-afternoon.

At about 14:00 ET the gradual uptrend channel on the 5 and 15 minute time frames broke lower. The afternoon highs also held resistance. Highs from Tuesday morning in the S&P 500 and Dow Jones Industrial Average and a pivot high on Monday afternoon held in the Nasdaq. The Dow had gained more than 300 points early on in the afternoon, but gains started slipping away in the final two hours of trade.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) closed up on the day by 196.89 points, or 1.8%, at 11,022.06. The gains were fronted by J.P. Morgan Chase (JPM), which closed with a 7.3% gain. General Electric (GE) also recovered some of its recent losses, up 6.2%, after it cut its earnings outlook and called off a stock buyback. General Motors (GM) led the Dow's losers, down 3.1% into the close. The S&P 500 ($SPX) rose 23.31 points, or 2%, and closed at 1,209.18 on Thursday. Telecoms and financials led the gainers with all 10 of the S&P's industry groups closing higher on the day. The Nasdaq Composite ($COMPX) climbed 30.89 points, or 1.4%, and ended the session at 2,186.57.

After the close, the afternoon turn to the downside continued. The index futures sold off steadily, erasing all of the Nasdaq's gains and most of those in the Dow and S&Ps by 8:30 pm ET. Research in Motion (RIMM) posted earnings following the close, earning 86 cents a share, which was in line with expectations, however, it lowered its profit outlook and shares took a beating afterhours, down more than 19% by 6:30 pm ET.

The market's turn to the downside leaves the potential open for that larger continuation lower that I postulated in yesterday's column. It will depend upon how it reacts to the evening support from the previous day. Although it can bounce back again into Friday, if it again takes a more rapid turn lower then it will not likely be able to bounce for a third time on a 60 minute all-sessions chart of the futures. Instead the indices can quickly break the lows of the week and move past those of last week as well before being able to bounce back again on a daily time frame.