Dusting Off My Old Dow 10K Hat... AWW CHOO!

Dusting Off My Old Dow 10K Hat... AWW CHOO!

(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.)

Good day! Well... I suppose that depends on your perspective! As I mentioned in Friday evening's edition, heading into the new week the market's bias was favoring further downside. That downside, however, was a bit more than many had bargained for! The indices once again experienced a larger-than-average gap lower after they continued to slide lower in off-hours trade.

I have spoken a great deal about how to approach such gaps recently, because the market has had more than its fair share of them over the past month. When tracking an opening gap for a bias, the initial step is to measure the highs and lows of the first fifteen minutes of the session. The direction those first 15 minute highs or lows breaks is the direction the market will then favor trending throughout the remainder of the morning. Often the market will give you a heads-up, like it did on Monday when it moved more slowly off the opening lows within a larger all-session base or bear flag that first began to form Sunday evening.

Nasdaq Composite ($COMPX)


After triggering the breakdown, the indices continued rapidly lower into the 10:15 ET correction period. Volume spiked and the correction period held. Given the momentum of the downside move, the market had a difficult time sustaining the reversal off the lows, even though in terms of the price action the indices managed a decent recovery. The downside had not yet established an equal move on a 15 minute all session chart, however, and it left plenty of room for the market to continue intraday. It is difficult to judge this added potential based purely on the charts from intraday price action, but consider that the indices were basing at lows into the open on Monday and take the move off Friday's highs into the gap zone. Then project this middle zone lower to offer the equal or measured move target.

The market's 10:15 ET bounce ran into the 5 minute 20 period simple moving average resistance at about the same time as the 11:15 ET correction period hit. The market slid down this resistance level and then fell into a base into the afternoon. It stepped lower out of that base at about 12:30 ET, but failed to confirm until a second breakdown just prior to the 14:00 ET correction period. This is a typical time in the market for strong moves to take place and the market quickly broke to new lows. The selloff continued until both the S&Ps and Dow hit 5 minute equal move support around 14:45 ET. This also was the equal move level on a 15 minute time frame for the all sessions charts when compared to that afternoon breakdown and continued afterhours selling on Friday. This placed the indices squarely into strong, higher time frame support ahead of the final hour of trade on Monday afternoon.

Dow Jones Industrial Average ($DJI)


By about 14:45 ET the Dow was down 800.06 points with the largest intraday point drop on record, mimicking the losses from just one week prior. Within the final 75 minute of trade, the Dow Jones Industrial Average ($DJI) managed to make back more than half the session's losses. The Dow closed lower on Monday by 369.88 points, or 3.6%, at 9,955. This was the first time the Dow had closed under 10k since October 2004. Bank of America (BAC) closed with the largest losses, down 6.55%, while Alcoa Inc. (AA) lose 5.87%, and General Motors (GM) lost 5.78%. Merck (MRK), Microsoft (MSFT), Citibank (C), and McDonalds (MCD) also all closed with losses over 5%. None of the Dow's 30 components managed to make any gains. The S&P 500 ($SPX) fell 42.34 points, or 3.8%, and closed at 1,056.89. The Nasdaq Composite ($COMPX) dropped 84.43 points, or 4.3 %. It closed at 1,862.96.

S&P 500 ($SPX)


Earlier overseas, the Pan-European Stoxx 600 Index fell 7.6%, for the largest one-day decline on record. Although the President signed in the $700 billion rescue plan passed by the House of Representative on Friday, European leaders failed to reach a consensus on how to cope with the financial crisis it finds itself facing.

Also making headlines on Monday, crude oil futures continued lower by $6.5% to $88.81 a barrel. It is now nearly 40% off its July highs. The national retail price of gasoline also finally continued lower once again from highs of $4.114 a gallon this summer to an average of $3.504 on Monday. As oil prices slid lower, the euro hit a 13-month low against the dollar. The euro to US dollar is at 1.355 currently (11:45 pm ET).

As I mentioned in yesterday's column, the markets are currently in the midst of an exhaustion on on the weekly time frame. We are already experiencing the extension of that move so far this week. The indices had already fallen into the congestion from 2004, which was serving as our larger target. The S&Ps pushed further, but both the Nasdaq and Dow are testing that larger monthly support. I expect the market to experience a larger correction off this zone of support, but since the time frame is quite large, there is a lot of wiggle room in the meantime. It will be very difficult for us to see any strong recovery in terms of price. Upside move will tend to be brief when accompanied with momentum. An example would be the recovery a few weeks ago in both oil prices and the euro. Each was subsequently met with another wave of selling back into the larger support. I think we are in for a bounce in both this week along with the overall market, but we are also wide open for another test of lows later this month or even into early November int he overall market, depending upon how the upcoming correction begins to form.