Market Takes a Plunge

Today's Commentary:
Note: Current contract month for the futures is now September.

Market Takes a Plunge

(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! There was no sector immune to the selling pressure that hit on Monday after the World Bank reported that the global economy is expected to contract by 2.9% this year. This is a more negative forecast than previously believed. The 60 minute index futures charts triggered a short set coming out of the 2:00 am ET correction period. The setup was an Avalanche™ within a larger Head-and-Shoulders. Support hit at the 5:00 am ET correction period with the completion of an equal move on the S&P 500 futures. A base then formed along the premarket lows to create a continuation short setup coming out of the 8:00 am ET correction period.

Dow Jones Industrial Average ($DJI)


The shifting pace in the premarket further confirmed the pace bias I discussed in yesterday's column, but it was also so strong that it prevented the market from being able to hold the support that had been in play throughout the second half of last week and the market broke the support quickly. This put the market back on the path to be drawn quickly into the 50 day simple moving averages that I spoke of throughout last week as the next major daily support. The weaker S&P 500 and Dow Jones Industrial Average had no trouble reaching this support in the morning trade.

Yesterday I spent some time discussing my favorite gap strategy in the indices. This consists of marking 15 minute highs and lows and taking a position in the direction of that break. In Monday's session the indices were mixed out of the open and the initial attempt by the Nasdaq to break higher went against the bias for the S&Ps and Dow and faced higher risk due to the trend placement and resistance levels. In Tuesday's session none of these cons weighed on the indices. The market gapped against the slower-paced uptrend, effectively triggering a channel break coming off resistance and the three indices all triggered shorts in the direction of the gap at the same time. Resistance was also in place from the previous day's lows in both the Nasdaq and Dow at opening highs and volume increased when the 15 minute lows broke to confirm the trigger.

S&P 500 ($SPX)


The morning selloff continued steadily into 13:30 ET with the 5 minute 20 sma serving as resistance. Even though the indices did not form the most ideal continuation patterns, the larger trigger helped reduce risk on new positions in the direction of the intraday trend using that 5 minute 20 sma zone and previous 5 minute highs as stop zones if broken. The market did attempt to recover somewhat in the mid-afternoon, but even the bounce off 13:30 ET lows was not stronger-than-average, so the pace did not shift enough to create decent reversal patterns. Instead the indices crept higher along the 5 minute 20 sma before breaking the support to flush lower once again in the final 20 minutes of trade. This left the indices closing at the day's lows.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) fell 200.72 points, or 2.35%, to close at 8,339.01 on Monday. The index had ran into price resistance at the year's highs less than two weeks ago and has struggled since. On June 8th of this month former Dow components General Motors (GM) and Citigroup (C) were replaced by Cisco Systems (CSCO) and The Travelers Companies (TRV). Surprisingly, not all of the Dow's index components lost ground. The telecoms finished higher, as did a retailer. Verizon (VZ) climbed 1.1%, while AT&T (T) rose 0.5%, and Wal-Mart Stores (WMT) rose 0.9%. Alcoa (AA) had a tough time, losing 8.91%. The financials were the top losers though. Bank of American (BAC) lost 9.68%, JP Morgan (JPM) fell 6.09%, while American Express (AXP) lost 6.09%.

The S&P 500 ($SPX) fell 28.19 points, or 3.06%, and closed at 893.04. Monday's losses put the S&P 500 back into negative territory for the year. Crude oil futures closed off 3.8% at $66.93 a barrel. It had risen 65% at the year's highs, but has fallen 9% since June 11th. The losses were large in stocks tied to oil. Transocean (RIG) fell 5.9%, while components Chevron (CVX) fell 3.4% and Exxon Mobile (XOM) lost 3.2%. Retail gasoline prices finally broke their 54-day trend in favor of higher prices and the average price of regular unleaded gasoline was $2.69 a gallon today. Other shares amongst the hardest hit on Monday included energy, metals, and the financials.

The Nasdaq Composite ($COMPX) fell 61.28 points, or 3.35%, and it closed at 1,766.19 on Monday.

Tuesday will bring with it the first day of the two-day FOMC meeting with a fed rate announcement to follow on Wednesday. There is still a major economic report to watch out for intraday, however, that can have a strong intraday impact on the market. This is May's existing-home sales data. Monday's descent was substantially above-average in terms of how quickly the market fell in the amount of time it took to do so. This leaves the indices quite extended into Tuesday morning, but it's currently 1:30 ET AM and the pace of the index futures has yet to shift off lows. The downside moves remain stronger than the upside ones even though the market has continued to hold the closing range. We can still see some slightly lower lows, but the pace of the overall selling should shift quite a bit so that even if the market continues to push lower in rapid bursts of selling, the pace of the selling on a 60 minute time frame will slow as compared to Monday morning. Keep an eye on Oracle following Tuesday's close. It will be reporting its fourth-quarter earnings.