Light Volume Holds into the New Year

(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 and welcome to the New Year! Volume was light once again on Monday despite many folks returning from their holidays. There are several potential reasons for this. The first is that many market participants may be taking it slow as they get back into the swing of things. There is a great technical reason, however, that makes more sense. After three strong waves of upside intraday on a 15 minute time frame since December 29th the market was exhausted. Such exhaustion at highs is often characterized by lighter than average volume. In this case it was about 20% less than the same period last year.

Heading into Monday's session we were looking for a correction off highs intraday to allow the market to take a bit of a break from its recent stint to the upside. This began right away into the open. The index futures had sold off quickly when they opened for trade on Sunday and then held a level of congestion into Monday's opening bell. At 9:30 am ET the futures were hitting resistance on a 5 minute time frame from earlier premarket action and this helped turn them lower again into the bell.

Nasdaq Composite ($COMPX)


The early morning selling continued until nearly 10:00 am ET, pushing past the typically 9:45 ET correction period. The Dow Jones Industrial Average displayed the greatest weakness into the open and this standing held throughout the day. While the futures hit new lows on the day following the open, the S&P 500 and Nasdaq 100 futures found support at previous 5 minute lows. The market pivoted off this support, which was also into the same 15 minute moving average support as had held in each of the prior two 15 minute corrections from the prior week.

A major difference in Monday's correction was that, despite the similar support levels, the support hit much more quickly and it was also the third pullback into it. This means that the market will have difficulty sustaining a move comparable to each of the past three waves higher and sets the stage for bull traps and reversal setups. The market actually rallied quickly quickly off the 15 minute support into 10:00 am ET. The rally continued sharply into the 10:45 ET correction period. At this point the indices also ran into price resistance from prior highs in the S&Ps and Nasdaq, while the weaker Dow hit price resistance from the closure of the morning gap. These resistance levels, combined with the correction period itself, put the brakes on the morning rally.

Dow Jones Industrial Average ($DJI)


The market held up fairly well mid-day with both the S&Ps and Nasdaq hugging the zone of the day's highs with slower pullback action within the congestion and more rapid upside. This is typically very bullish, but the trend placement was a strong con against an afternoon breakout. The upside pace slowed coming out of the 13:00 ET correction period. This was the end of a second pullback off the highs within the congestion and is a typical buy trigger. While it worked great for a daytrade, it didn't offer the same magnitude of gain as a similar pattern would yield when placed differently within a larger trend. The result was a stair stepping move into new highs on the day.

When the 14:00 ET correction period hit, both the S&Ps and Nasdaq were trading at new intraday highs, just barely breaking higher out of the mid-day trading range. The Dow, on the other hand, was testing the day's highs for strong price resistance. 14:00 ET is another strong afternoon correction period and the market used it quite well. The indices pivoted sharply off highs and the S&Ps and Nasdaq were soon back to the lower end of the mid-day range, while the Dow was testing morning lows by about 14:45 ET. The market continued lower after a minor bounce off the price support, but held the lows at the 15:30 ET correction period, which corresponded to the opening price zone in the stronger Nasdaq. This late day bounce helped cut the losses on the session, but the market still closed in negative territory with the Dow confirming an end to last week's uptrend.

S&P 500 ($SPX)


The S&Ps also showed confirmation of the correction by breaking the uptrend channel. While both the S&Ps and Nasdaq have shown corrections to the trend, however, they technically still have higher highs and higher lows, albeit minor ones on the 15 minute time frames. The uptrend remains extended on an intraday time frame, but other than more scalp-like setups, we have not yet seen a strong reversal pattern form to show a greater price correction. The S&Ps do have a 30 minute 2T reversal pattern (a type of double top) that triggered out of 14:00 ET, but the slower break lower off the highs compared to the morning drop is not as ideal for a strong continuation lower at this point. I suspect that shorter term daytrades will remain the best option on Tuesday, using the 15 minute charts for timing while the market tries to round off here more at highs before showing a greater correction in price off this daily resistance zone.





The Dow Jones Industrial Average ($DJI) posted a loss of 81.80 points, or 0.9%,on Monday and closed at 8,952.89. 22 of the Dow's 30 index components closed in negative territory. Despite incredibly dismal data from the auto industry showing December sales results, General Motors (GM) was one of the few to post gains on Monday. It climbed 1.6% to $3.71 after stating more than a 32% decline in sales in December alone. Many had expected worse. Ford (F) sales were down 32% in December, but in line with expectations, while Toyota Motor (TM) posted a decline of 37% and Honda Motor (HMC) showed a sales drop of 35%.

The S&P 500 ($SPX) fell 4.35 points, or 0.5%, on and closed at 927.45. Crude oil prices continued to climb after hitting yearly lows about a week ago. They closed at $48.81 a barrel for February delivery and are up 38% off the Dec. 24th low of $35.35.

The Nasdaq Composite ($COMPX) closed lower on Monday by 4.18 points, or 0.3%, to end the session at 1,628.03. Apple Inc. (AAPL) found its share prices receive a boost when Steve Jobs stated that he is undergoing treatment for a hormone imbalance which has resulted in his recent weight loss. Concern had begun to spread that it may have instead been caused by a return of the cancer he had been afflicted with back in 2004.