Daily Correction Continues with 60 Minute Range

Daily Correction Continues with 60 Minute Range

(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! At the beginning of this past week the market was hitting a very strong resistance zone on not only daily, but also weekly time frames. This has made it difficult for upside action to follow through strongly from one session into the next and the overall pace of the buying on the 60 minute time frame has slowed. Both the S&P 500 and Dow Jones Industrial Average hit resistance with equal move zones on a daily time frame on the October rally as compared to the September one, as well as on the weekly time frames on this current rally off the July lows as compared to the move from March into early June. Additionally, they are striking their 100 week simple moving averages. This left me very leery of entering trades for longer holds on the upside this past week.

On Wednesday the indices sold off very sharply in the afternoon. Despite the descent, they managed a good recovery on Thursday, but a low created in this manner typically falls into a longer trading range and cannot easily break through the previous high. In this case, it meant Wednesday's afternoon highs. As a result, we were expecting that zone to hold into Friday and even though the market gapped higher into the opening bell, it was exhausted and simply could not push through the resistance from Wednesday. The opening prices held with the gap and the market began to turn lower to close with gap within minutes of the bell.

Dow Jones Industrial Average ($DJI)


At 10:00 am ET the National Association of Realtors reported that sales on existing homes jumped 9.4% in September. A large portion of this increase was attributed to the government's tax credit offered to first-time buyers which is currently due to expire in November. September's sales were at their highest level since July 2007 and came in at a seasonally adjusted annual rate of 5.57 million. The revised August rate was 5.1 million. Before getting too excited, however, some more sobering data to keep in mind is that unemployment rose to 9.8% in September, and despite increased sales, foreclosures are still at extremely high levels. For example, default notices on homes in California have risen nearly 19% according to the third quarter data when compared to a year earlier.

Selling increased following the 10:00 ET data, although support still held at the 10:15 ET correction period. This was the 15 minute 20 period simple moving average zone in the S&Ps as well and the gap closure in the Nasdaq. The result was a correction along the lows, but a continuation of the selloff around 10:45 ET. The selling continued into 11:15 ET with the market finally finding morning support at the Nasdaq's 15 minute 200 sma and previous 15 minute lows on the S&Ps and Dow from mid-day on Thursday.

S&P 500 ($SPX)


The momentum from the morning descent confirmed another "V" within the 15 minute trading range, albeit an inverted one this time around. This favored a return to the zone of Thursday's lows, but also a continuation of the larger 60 minute trading range. Often what happens within a range is that subsequent tests of previous highs and lows may not exactly hit the previous ones and instead stall as they come into the zone of those support and resistance levels. This was the case in Friday's session as well. The market had corrected over noon, failed to break the 15 minute 20 sma when it attempted a premature Phoenix™ by not resting the ideal amount along the 5 minute 20 sma, and then breaking lower again into the 13:00 ET correction period. New lows on the day were made into the 13:30 ET correction period, but they were only slightly lower than the morning lows.

A slightly lower low is the first criteria for a 2B double bottom, but the pace of the selling into the 13:30 ET low was too strong to allow the market to completely reverse once again. The indices pulled higher off the support zone on the 15 minute time frame, but the action was choppy and lacked volume and momentum confirmation. The 15 minute 20 sma zone held, along with the level of the mid-day congestion, and the session ended near the day's lows. Overall, the day was not an easy one for traders on the 5 minute time frames due to the added choppiness within the session, but the 15 minute bias held quite well.

Nasdaq Composite ($COMPX)


On Friday, crude oil futures closed lower by $0.69 cents a barrel at $80.50 as it continued to hold daily resistance levels.

The Dow Jones Industrial Average ($DJI) fell 109.13 points, or 1.08%, on Friday to close at 9,972.18. Out of the Dow's 30 index components, only Microsoft (MSFT) and Hewlett-Packard (HPQ) posted a gain. MSFT rose 5.38% after reporting better-than-expected earnings despite an 18% drop in third-quarter profit. HPQ rose 0.50%. American Express (AXP) posted the biggest loss by falling 5.10%. DuPont (DD) was the second-largest loser. It fell 2.41%. Boeing (BA) fell 2.31%. For the week as a whole the Dow lost 0.2%.

Meanwhile, the S&P 500 ($SPX) fell 13.31 points, or 1.22%, and closed at 1,079.60. The S&P 500 ended the week lower by 0.7%. Only 45 of its index components posted a gain on Friday. Amazon.com (AMZN) was the best-performer for the day. It climbed an incredible 26.80% with a record close after it reported a 68% profit increase for its third quarter and offered a strong forecast for the fourth quarter. So far this earnings season, the tech companies have been the top leaders with 31 of 36 topping sales estimates.

The Nasdaq Composite ($COMPX) fell 10.82 points, or 0.50%, and it closed at 2,154.47 on Friday. Amazon.com (AMZN) was by far the biggest winner in the Nasdaq-100 on Friday. Despite its stellar performance, only 11 of the Nasdaq-100 index components posted gains for the day and 588 of the 2,748 Nasdaq stocks.

I am continuing to be more cautious on the upside, but we have yet to see any confirmation on larger corrective moves off highs. The range itself on the 60 minute charts has not allowed the indices to adequately shift momentum in favor of a stronger correction. The market needs to break the 50 day simple moving average before it confirms a weekly correction, but in order to even get there we need to see a shift in momentum on the smaller time frames where slower upside action follows stronger selloffs into that 50 day sma zone. Earnings is going to continue to play a strong role in influencing intraday direction this coming week. 149 of the S&P 500's index components are expected to report earnings, along with 4 of the Dow's industry companies.