Excellent Technical Day in the Indices as Dow Tests Yearly Highs

IMPORTANT UPDATE: I want to thank everyone that attended my webinar last week titled Developing a Universal Trading System. Due to its popularity, I decided to offer it a second time on June 16th. Well, within 48 hours that one was also full! Don't worry though, I will be holding a number of such classes over the next several months. In fact, I will be teaching a class for the CME Group in just a couple of weeks. I will send out the registration link to those of you who follow me on a daily basis first before opening it up to the general public, so keep an eye out for it! I will also be sharing an updated version of the class on how to develop a universal trading system at November's Online Trading Expo, so I hope you can make it! It will be fun!!! I'll let you know the details as soon as possible!

Today's Commentary:

Excellent Technical Day in the Indices as Dow Tests Yearly Highs

(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! After breaking free from their daily trading range on Friday afternoon, the indices continued to climb sharply into Monday morning and all 10 of the S&P 500's industry groups posted gains. The rally was accompanied by news of General Motor's (GM) bankruptcy filing, which is the third largest in U.S. history. That run, however, took the indices into the larger daily resistance levels we have been keeping an eye on over the past several weeks with the Dow Jones Industrial Average testing the year's highs. This resistance zone not only kept further buying in check after the larger-than-average intraday run on Monday, but it kept them at bay on Tuesday as well. This was despite positive housing data that led to a sharp, albeit brief, morning rally.

Dow Jones Industrial Average ($DJI)


Pending home sales rose for the third month in a row, beating expectations, and the market took off. Like most sprinters, however, the move was short-lived. The upper resistance held and the indices turned off highs at a faster-than-average pace, pulling back into support at the 5 minute 20 sma zone. By forming a slower bounce off this support, the indices created a 5 minute Avalanche™ short setup that triggered with the 10:45 ET correction period. The new intraday downtrend continued with a bear flag on the same time frame going into 11:30 ET.

Over noon the intraday pace began to shift. The 5 minute 20 period simple moving average served as resistance, leading to one more push lower out of 12:00 ET, but the pace was more gradual than during the previous bear flag. The Nasdaq Composite almost evenly paced that 5 minute 20 sma as it headed lower. Since the trend was already exhausted with three waves lower, this made it easy for the indices to form a type of bear trap with a very slightly lower low into 12:30 ET called a 2B. This is actually a reversal strategy and was the first strong buy setup following the morning gap and new run.

S&P 500 ($SPX)


The market pulled higher out of the 2B but then fell into a range along the 5 minute 20 sma. By hugging this resistance zone, the indices developed a Phoenix­™ buy setup that was also part of a 5 minute reverse head-and-shoulders pattern. It triggered coming out of 13:30 ET and led the market back into the congestion that had formed the morning Avalanche™. A bull flag came next with the 5 minute 20 sma as support. This meant that the morning pullback was now essentially reversed. In fact, the upside pace was very similar in the Dow overall as the earlier downside, although tit was a bit more gradual in the Nasdaq.

A third push higher on the 5 minute time frame also exhausted the afternoon rally. The indices again tried to push the limits of that trend exhaustion, but instead of forming the opposite pattern of the 2B, they pushed more quickly for a slightly higher high, followed by yet another, which resulted in a series of three highs total. This creates another type of reversal pattern that is one of my favorites that I refer to simply as a momentum reversal because the overall pace of the buying has now shifted. The short setup triggers coming out of the third high. In this case the follow-through was not strong to begin with, but the selling pace increased following a larger rounding off of the the indices at intraday highs. By midnight the S&P 500 futures were already back to testing the mid-day lows.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) rose 19.43 points, or 0.22%, to close at 8,740.87 on Tuesday. Alcoa (AA) led the upside with a gain of 7.02%. Boeing (BA) came in with a distant second place gain of 3.14%. The largest decliners were in the financials. American Express (AXP) fell 4.92%, followed by a 4.88% loss in Citigroup (C), and a 4.46% loss in JP Morgan & Chase (JPM).

The S&P 500 ($SPX) rose 1.87 points, or 0.20%, and closed at 944.74.

The Nasdaq Composite ($COMPX) rose 8.12 points, or 0.44%, and it closed at 1,836.80 on Tuesday.

The week's upside still leave the markets extended on a 60 minute time frame. The easiest direction will be to correct more off the highs. There is still a little wiggle room at this daily resistance, but its riskier at this point to look for strong buying opportunities. The 60 minute 20 sma will serve as support and that might create the possibility for more upside, but the pace would have to shift in favor of the bulls with such strategies like the 2B or momentum reversals we just explored intraday. Nevertheless, the larger time frames remain a higher risk with the 50 week sma just overhead in the S&Ps and Dow. This week also remains heavy on the data front and this can easily influence market action, so be sure to double check the day's current economic calendar if you are in doubt!


Notice: I will heading to Iowa for my annual camping/road trip to see my family this morning until the following weekend. As a result, no Market Action Letter will be posted during this time. Don't worry though! I'll be back before you know it! For those of you in Cali., don't forget that the Online Trading Expo is also being held June 3-6, 2009! Even though I can't make it to the LA expo, I will definitely be at the one in Las Vegas in November, so I hope you can join me there!