Market Uncertainty is Apparent

Good day! Trade action on Wednesday can best be described as "sloppy." After falling 778 points on Monday for its worst-ever point decline, the Dow Jones Industrial Average ($DJI), along with the other major indices, pushed higher in a steady, but choppy uptrend on Tuesday. The failure by the House of Representatives to pass a bill designed to stabilize the economy was disappointing to many, magnifying the losses on Monday, but the momentum higher on Tuesday was not enough to create a larger reversal off the lows. The odds, in fact, favored a break of the 5 minute 20 period simple moving average into the morning. The market simply cannot sustain a rally that holds the 5 minute 20 sma throughout the session like it did on Tuesday without breaking it first thing the next morning. It didn't even wait that long on the all-sessions charts. By the time the opening bell rang on Wednesday morning prices in the indices were already under this prior support level, which became resistance as a result.

The channel break in the market created the start of an intermediate time frame downtrend that lasted into the 11:00 ET correction period on Wednesday morning. The drop out of the open continued lower following the 10:00 ET economic data. The indices had congested for approximately 20 minute ahead of the data, but then fell sharply lower when the Institute for Supply Management's manufacturing index fell at a pace that was much faster than anticipated for September. This signaled that the U.S. economy has truly fallen into recession territory with the ISM index down to 43.5%, off a reading of 49.9% in August. The number had been expected to fall to 49.6%, but instead it was the largest monthly decline since 1984.

In other morning news, the Mortgage Bankers Association announced that mortgage applications for the past week had plunged 23%. Year-over-year applications are down 28.4%, while the average mortgage range for a 30-year fixed mortgage stepped down to 6.07% from 6.08% the previous week.

Nasdaq Composite ($COMPX)


Price support from the middle of the triangle on Monday afternoon hit at the same time as the 11:00 ET correction period on Wednesday morning. This was also the third wave of selling on a 5 minute time frame, indicating trend extension on that time frame. These three attributes contributed to lows holding in the market at that time. To assist with a mid-day reversal, the pace of the downside into 11:00 ET was substantially slower than the drop at 10:00 am ET. This shift in momentum, particularly in the S&P 500 and Dow Jones Industrial Average, allowed the indices to pop strong higher into the early afternoon.

Dow Jones Industrial Average ($DJI)


Two waves of buying took place mid-day on Wednesday. The 5 minute 20 sma served as initial resistance in the weaker Nasdaq, while the 5 minute 200 sma stalled the Dow and morning highs stalled the S&Ps. This 5 minute resistance held briefly into the afternoon, but the second wave of buying took hold shortly after 12:00. This rally continued into larger resistance on a 15 minute time frame from Monday morning's price congestion.

From this point onward, the day was quite a mess. The resistance held and the indices pulled back, but they fell into a range not unlike that which took place on Monday afternoon. The action was not nearly as smooth, however, and overlap on a 5 and 15 minute time frame was quite extreme, making trading on Wednesday afternoon quite difficult if one wished to keep stop levels narrow. A few scalp moves took place, but the risk to reward was not very favorable overall compared to similar setups on a "normal" trading day.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) closed lower on Wednesday by 19.59 points, or 0.2%, at 10,831.07. Leading the downside was International Business Machines (IBM), which fell 5.84%. Alcoa Inc. (AA) was a close second, down 5.8%. Meanwhile, Caterpillar Inc. (CAT) dropped 4..45%. Making headlines with the announcement that it would sell $12 billion in common stock in a secondary offering and $3 billion in preferred shares to Warren Buffet's Berkshire Hathaway (BRK), General Electric (GE) fell 3.9%. Citibank (C) led the gainers, up 12.14%, while Bank of America (BAC) gained 8.94%, and J.P. Morgan Chase (JPM) rose 6.27%. The S&P 500 ($SPX) fell 3.68 points, or 0.3%, and closed at 1,161.06. Energy, industrials, materials, and technology all lost ground on the day. The Nasdaq Composite ($COMPX) outpaced the rest of the market on the downside by quite a lot, falling 22.48 points, or 1.1%. It closed at 2,069.40.


I think that we will find that the market is going to remain on "wait-and-see" mode until the proposed $700 billion bail-out bill comes before the House of Representatives again on Friday. The bill passed in the Senate Wednesday night by 74 to 25 and the indices futures were trading quite a bit lower into midnight. As I mentioned in yesterday's column, the technical action in the indices has the door wide open for another move lower on a daily time frame, which could very easily correspond to Friday's vote. The time frame between the last two lows was 7 trading days. Friday would fall right at that same time zone for another break lower. The 20 day simple moving average will act as resistance and is heading lower as the week progresses.