Market Continues to Show Weakness Despite Sharp Mid-Week Rally

Market Continues to Show Weakness Despite Sharp Mid-Week Rally

(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! The market extended Friday's afternoon losses into the morning on Monday. Another it had little impact on premarket action, the Federal Reserve reported that industrial production increased somewhat in October. September's decline was revised from -2.8% to -3.7%, but it rose 1.3% this past month. Factors such as hurricane action in the Gulf and a strike at Boeing were cited as the major cause for September's massive decline, but few will disagree that we are currently seeing more and more proof of a global market recession, whose impact extends to the manufacturing sector as well. One of the major news events was the loss of 50,000 jobs by Citigroup, Inc. (C).

Nasdaq Composite ($COMPX)


The opening continuation action in the form of a gap lower left the index futures at price support into Monday's open from congestive action during the middle of the past week. The market reacted to the support with a closure of the Nasdaq's gap zone, but the pace of the downside made it very difficult for the market to attempt any larger price correction off the lows. Instead, the indices went the typical route following a larger-than-average move and fell into more of a congestive correction with only moderate upside intraday.

The morning lows hit in the indices at about 10:15 am ET. This was followed by a small Phoenix pattern on a 2 minute time frame. The Phoenix triggered coming out of the 11:00 ET correction period and took the indices higher into 11:15 ET. A second base formed along the 5 minute 20 sma. This latest range broke on the upside at about 11:45 ET. All three of the major indices used this action to completely close the morning gaps before the pace shifted over noon.

The 15 minute 20 period simple moving averages intraday held as strong resistance on the mid-day rally and the market slowed into them. By rolling over into 13:00 ET the market was able to eventually create a larger 15 minute base along lows for a reverse cup with handle pattern or Avalanche. This triggered shortly before the close at about 15:30 ET and the setups continued to follow through in afterhours trade.

Dow Jones Industrial Average ($DJI)


The Dow Jones Industrial Average ($DJI) fell 223.73 points, or 2.6%%, on Monday to close at 8,273.58. Out of the Dow's 30 index components, 27 closed in negative territory. The losers were led by Alcoa Inc. (AA), which fell 10.79 points. Bank of America (BAC) was the second largest loser in the Dow, falling 8.47%. Another financial firm, Citigroup (C), came in third with a loss of 6.62%. Despite trading well under $5 a share since earlier this month, General Motors (GM) led the advancers with a gain of 5.65%. At $3.18 a share at the close, however, this is hardy enough to stir favorable sentiment. General Electric (GE) and Boeing Co. (BA) also posted gains, but only by a fraction of a percentage point.

The S&P 500 ($SPX) lost 22.54 points, or 2.6%, and closed at 850.75. All 10 of the S&P's industry groups closer lower on the day. Leading the decline were financials, consumer discretionary, and materials. On the retail front, the second largest U.S. discount retailer, Target Corp. (TGT), fell 4.1% on Monday after it reported a fiscal third-quarter profit decline of 24%. It also cut its spending outlook for 2009 and decided to temporarily suspend its share repurchase plan. Net quarterly income for the past fiscal quarter ending Nov. 1 fell 49 cents a share from 56 cents a share one year ago, while total revenue increased 1.9%.

The Nasdaq Composite ($COMPX) dropped 34.80 points, or 2.3%, and closed at 1,482.05.

Crude oilfutures also continued to slip lower on Monday, down $2.09 a barrel to close at $54.95 a barrel for December delivery on the New York Mercantile Exchange. If you do not have access to futures charts intraday, you can also track its progress by following USO.

Although not nearly as bad as on Friday, decliners still outpaced advancers on Monday by 2 to 1 on the New York Stock Exchange and about 3 to 2 on the Nasdaq on modest volume.

S&P 500 ($SPX)


Due to Monday's closing price action, I am favoring further downside into Tuesday morning. Volume was steady throughout the congestion on Monday, indicative of a continuation pattern forming. Support will hit in the zone of the prior lows on a 15 minute time frame. This will also be approximately and equal move level on a 15 minute time frame when comparing the drop off Friday's afternoon highs into Monday's morning lows to the likely break lower into Tuesday morning.

Should the indices chop lower through this third test of lows on the daily time frame, it will open the door for a sharp and seemingly unexpected pop higher very quickly with a channel break of that slower downside channel. In order to prevent this, it would be better for the indices to bounce here and than attempt to break the lows in another week or two. I think that given the pace of the downside on the 120 minute charts, however, that the former is more likely than the latter.



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