Indices Fall to Lower End of Daily Trend Channel

Indices Fall to Lower End of Daily Trend Channel

(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! The market was not very happy on Wednesday. The indices had rolled over off highs to confirm a daily correction on Monday and has been under pressure throughout the week. Monday's trigger was followed by a lot of congestion into the end of the session that carried throughout a larger portion of Tuesday with intermittent selling. On Wednesday, however, the mood was particularly grim. The session began with a relatively mild gap lower. The gap itself had triggered a bear flag on the 15 minute time frame. The gap zone closed within the first 15-20 minutes of the day, but that resistance level held and the market spent the remainder of the session in a steady downtrend right into the closing bell.

Dow Jones Industrial Average ($DJI)


Wednesday's economic data did not help the mood of leery investors. The morning's durable goods data didn't cause too much of a stir. The Commerce Department reported a 1% increase in durable-goods orders in September. New home sales, however, fell for the first time in six months. This data came out at 10:00 am ET and took the indices to new intraday lows. September sales were down 3.6% from August and 7.8% compared to a year ago. Home builders took a lot of heat. Lennar (LEN) fell 7.5% on the day, while Pulte (PHM) shares dropped 5%.

The 5 minute 20 period simple moving average served as resistance throughout most of Wednesday's session. Each time the indices approached that level they sold off. Most of the waves of selling took the form of 2-wave continuation patterns. This means that an initial wave of upside (or correction) is followed by a second move that corrects from the selling. In this case, the first wave was an upside move and the second wave was always a slower, sideways base. I have drawn each of these waves on the charts in red to help make them easier to pick out. They are shown with the initial upside wave, the pullback from that wave, and then the base. The trigger for the 2-wave correction as a short setup is circled in red. The two most notable setups took place coming out of 12:00 and 14:00 ET.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 119.48 points, or 1.21%, on Wednesday to close at 9,762.69. The telecoms outshown the rest of the market with Verizon (VZ) closing higher by 2.57% and AT&T (T) gaining 1.88%. Over 1/3 of the Dow's 30 index components fell more than 2%. The biggest loser in the Dow was Alcoa (AA), which fell 6.87%. Caterpillar (CAT) fell 3.99%, while Intel (INTC) lost 3.6%, and American Express (AXP) closed lower by 3.56%.

Meanwhile, the S&P 500 ($SPX) fell 20.78 points, or 1.95%, and closed at 1,042.63. The financials were the biggest losers in the S&P 500. Oil, energy, and materials were also hit. They had been testing resistance on the daily time frame, as I mentioned over the course of this past week, and fell sharply on Wednesday as the dollar climbed. Crude oil futures closed lower by more than $2 a barrel, down from $79.55 on Tuesday to end the session on Wednesday at $77.46 a barrel.

The Nasdaq Composite ($COMPX) fell 56.48 points, or 2.67%, and it closed at 2,059.61 on Wednesday. Only three of the Nasdaq-100's index components posted a gain. The top performer was Baidu (BIDU) with a gain of 3.43%. Qualcomm (QCOM) followed with a 1.54% gain. First Solar (FSLR) was the final gainer, up 0.91%. Illumina (ILMN) was the biggest loser with a huge 19.90% loss. Apollo (APOL) fell 17.69% and Garmin (GRMN) dropped 16.38%. Overall, the Nasdaq was pummeled in Wednesday's session.

Nasdaq Composite ($COMPX)


I am expecting that within the month we will see the market at 100 day sma levels. As I've discussed every year, October is a major monthly correction period, so when we combine this with the weekly and monthly resistance I've talked about over the past several weeks, it should be extremely difficult to break this zone on the upside without first correcting on the larger weekly time frame. We will still see smaller upside moves even within such a correction, however, so be careful even when timing setups in favor of such a correction. Shorting on high volume once selling is well under way will increase your odds of getting stopped out on market rebounds. The market is also very news-driven right now with earnings season in full swing. This will tend to increase volatility.