Momentum Reversal Flushes Markets Lower

IMPORTANT UPDATE: I want to thank everyone that attended my webinar on 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. Ongoing education is extremely important in this profession and since my webinars fill up rather quickly, I'll be sending out registration links to those of you that have worked with me in an educational capacity whether through my courses or mentoring 24 hours 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:

Momentum Reversal Flushes Markets Lower

(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! In yesterday's column I looked at the momentum reversal pattern that was forming on the 60 minute and daily time frames heading into this week. This was created when the market jumped higher into the start of the month and then shifted momentum as it made slightly higher highs over the course of nearly two weeks. The pace was then slower on the upside in Friday's session on light volume. This shift in the pace of the buying created the potential for sharp downside flushes with the 20 day simple period moving average serving as our first major support level, just as it had in April when a similar pattern had also developed.

Dow Jones Industrial Average ($DJI)


The market triggered the most recent momentum reversal short pattern immediately out of the open on Monday morning when the indices gapped sharply lower into the bell. The initial premarket trigger took place coming out of the 2:00 am ET correction period, however, when the index futures, which had been trading in a range on the all sessions time frame since 16:15 ET on Thursday, broke down. The move continued out of a smaller premarket base at low that formed between 4:00 am ET and 9:30 am ET Monday morning and the selling continued until the index futures struck that first major daily support at the 20 day sma.

Following the open, the indices stepped quickly lower. That 20 day sma support hit when the market broke down out of its strongest intraday move into 10:30 am ET after a light volume base along early morning lows. By the time that daily support hit the indices were faced with their worst losses in at least a month. The support, however, did not merely hit on the daily time frame. The indices also struck intraday support by established an equal move as compared to the selloff from last Thursday into last Friday morning's lows. This had hit earlier on the Dow, but both the S&P 500 and Nasdaq 100 futures contracts came into this same type of support when the daily charts hit the 20 day sma.

S&P 500 ($SPX)


This mix of morning support levels made it extremely difficult for the market to get in much additional movement throughout the remainder of the session, although support and resistance levels still held extremely well and offered a number of scalping opportunities. One example was the indices' returned to intraday lows after striking 15 minute 20 sma resistance at 14:30 ET. It had taken nearly the entire session on Friday to correct from the selling into Friday morning, however, so the congestion following 10:30 ET on Monday was not quite long enough to allow for a third push lower. The daily support is also quite strong and a previous attempt at a similar move in mid-April failed to break comparable support. The indices are move extended now, however, and at stronger weekly resistance, so I believe that the odds are higher for this support zone to break. This would place the next support level at the 50 day simple moving averages in the indices.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) fell 187.13 points, or 2.13%, to close at 8,612.13 on Monday. Only Microsoft (MSFT) and American Express (AXP) posted gains in this index, albeit only by a fraction of a percent. Top losers included Alcoa (AA) with a loss of 6.51%, DuPont (DD) with a loss of 4.48%, and Merck (MRK) with a loss of 4.29%.

The S&P 500 ($SPX) fell 22.49 points, or 2.38%, and closed at 923.72. A mere 22 of the S&P 500's index components ended the day in positive territory. Crude oil closed lower by 2% at $70.62 a barrel in New York, while gold fell $13.20 an ounce to $927.50.

The Nasdaq Composite ($COMPX) fell 42.42 points, or 2.28%, and it closed at 1,816.38 on Monday.

Monday's economic data revealed a huge disappointment in the Empire State's manufacturing index which fell to negative 9.4 in June after a reading of negative 4.6 in May. This was quite far from economists' expectations of a reading of negative 3. Anything under 0 indices contraction. Tuesday's economic data includes current housing starts, along with May's producer prices and industrial production data. May's consumer-price index and the weekly petroleum inventories will be released on Wednesday, followed by the Philadelphia region manufacturing survey and weekly jobless claims on Thursday.