Market Faces Corrective Action Following Thursday's Late-Day Surge

Market Faces Corrective Action Following Thursday's Late-Day Surge

(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 surged sharply on Thursday with an intraday range of over 900 points in the Dow Jones Industrial Average that had taken it back into October's lows before sharply reversing higher into the close. The indices had struck strong resistance levels into the closing bell with three waves of buying in place and the 15 minute 200 period simple moving averages hitting intraday. This helped turn the index futures lower in afterhours trade. As I mentioned in yesterday's column, the gradual decline compared to the rally created the possibility of a 2T on the all sessions time frames. This would have meant a very slightly higher high that would serve as a trap before the downside pace increased. When I published yesterday's column, however, the indices were not yet forming this potential trap and the market continued to favor a more gradual erosion in prices.

In the end the two possibilities were were looking at combined. The index futures did attempt to head back into highs at 3:00 am ET, but they failed to penetrate the upper level price resistance. Nevertheless, this attempt alone was enough to help shift the pace of the selling as compared to that which had been in place heading into midnight and the market gained momentum on the downside on Friday morning.

Adding to the weakness on Friday was premarket data from the Commerce Department which estimated that U.S. retail sales fell by a record 2.8% in October. This was worse than the expected 2.3% decline, which in and of itself was rather dismal. Auto sales fell 5.5%, but even excluding these numbers, retail sales dropped 2.2%, remaining in record territory. The last time retail sales had fallen for four straight months was in 1974.

Nasdaq Composite ($COMPX)


There was a brief attempt at a recovery out of the bell, but by 10:00 ET the selling had resumed and the market continued lower into noon. Since the indices failed to form a true trap in the premarket action, the overall selling was still more gradual than the prior day's rally and when the market came into price support from the 15:00 bull flag on the 5 minute on Thursday it was strong enough to roll the indices over at the lows. This support zone was also the 38.2% to 50% retracement levels in the index futures and price support from prior 15 minute highs earlier in the week, so this created additional incentives for an upside correction heading into the 12:00 ET correction period.

On the Nasdaq, three distinct lows formed on the 5 minute time frame with each low breaking the previous one on downside chop following a sharper descent out of 10:00 am ET. This created the basis for a mid-day momentum reversal pattern which triggered shortly after noon when the upper end of the late-morning channel broke to the upside. This resulted in an upside bias throughout the majority of the afternoon.

Even though the Dow first hit its 15 minute 200 sma and the S&Ps followed soon thereafter, it was the Nasdaq's 15 minute 200 sma that I focused on as the main target for a larger resistance level and reversal into the final hour of trade (as posted in my live trading room). The reason is that this added time allowed the Nasdaq to form three highs on a 200 tick chart that would help shift momentum again. It held perfectly with the 15:00 ET correction period and the indices fell sharply, giving back all of their late-day gains to put them firmly back into negative territory for the day.

Dow Jones Industrial Average ($DJI)


The Dow Jones Industrial Average ($DJI) closed lower on Friday by 337.94 points, or 3.8%, at 8,630.32. On the week as a whole the Dow is down 3.5%. Intel Corp. (INTC) led the losses on Friday, down 7.69%, while Home Depot (HD) fell 7.60%, and J.P. Morgan Chase (JPM) fell 7.31%. Out of the Dow's 30 components, only General Motors (GM) and Citigroup Inc. (C) posted gains on Friday. GM rose 2%, while C rose less than 1%.

The S&P 500 ($SPX) fell 38.00 points, or 4.2%, and closed at 889.41. This week's losses in the S&P 500 came to -6.2%. On Friday the losses were led by consumer discretionary, financials, and energy. Crude oil prices fell 7% on the week. Oil futures closed at $57.04 a barrel, down $1.2 from Thursday's close.

The Nasdaq Composite ($COMPX) shed 79.85 points, or 5.0%, and closed at 1,547.14. The Nasdaq lost more than the other three indices for the week as a whole, down 7.9%. On Friday decliners outpaced advancers on the NASDAQ and New York Stock Exchange by approximately 4 to 1.

S&P 500 ($SPX)


The market is still at risk of an attempt to push slightly lower by the end of the year, although the third test of lows created the holding pattern we had been expecting into the weekend. The lows from 2002, however, are quite close and can still act as a magnet. The best pattern at this zone of support that would lead to a stronger bounce into next year would be a decent pull off this third low into about the 50 day simple moving average, followed by another strong breakdown into the larger monthly support from 2002 in the S&Ps and Dow. This would then form a 2B on the weekly time frame. This retest will often come in the form of two waves of selling.