Market Confirms Short-term Trend Correction

Market Confirms Short-term Trend Correction

(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 has been flirting with resistance on the daily and weekly time frames for about two weeks. This resistance includes the 100 week simple moving average in the S&P 500 and Dow Jones Industrial Average. On Monday the market offered the first confirmation of a correction by establishing lower highs and lower lows on a 60 minute time frame. This has created a rounded appearance at the highs.

Monday's session began with strong upside. The indices had sold off on Friday morning and then shifted momentum into the close, creating a momentum buy setup into the new week. Even though the pace of the buying was strong, it was short-lived and only lasted until about 10:00 ET. At that point the pace shifted intraday for a smaller version of the 60 minute rounded highs. From 10:30 ET into 11:15 ET the market based and created a shallow Avalanche™ on the 5 minute time frame.

Dow Jones Industrial Average ($DJI)


A shallow Avalanche™ is a very strong short setup and the 11:15 ET time zone is a typical period in the day in which corrections will begin. The next one is not until 12:00 ET on a 5 minute time frame. When selling began, it was at an above-average pace, but not extreme. Within 15 minutes, however, that pace increased substantially. The financials were amongst the hardest hit due to intraday downgrades in the sector.

The market did pause when the Nasdaq returned to opening levels and the S&Ps and Dow hit Friday's lows, but it continued after a small triangle on the 2 minute time frame. This continuation lasted until that 12:00 ET correction period. At that point the indices had hit equal move support compared to the 21st-22nd selloff and the S&Ps and Dow were coming into their 20 day simple moving average. The Nasdaq also found support at this time with Thursday's lows.

Strong selloffs occurred intraday on Wednesday and Friday of this past week that were similar to the intraday downside late Monday morning. The initial moves off support were slow in each of the prior two selloffs, although in each case the buying did increase after nearly a day. It should come as no surprise that it would be difficult for the market to gain upside momentum off Monday's mid-day support as well and the market spent the remainder of the session in a narrow trading range along the day's lows. However, it does decrease the odds that it will repeat the increase in upside momentum that the market experienced within a day of the previous two lows.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 104.22 points, or 1.05%, on Monday to close at 9,867.96. Only three of the Dow's 30 index components posted a gain. The strongest was Microsoft, which had gapped higher the previous session on earnings and then sold off into the prior day's close. It recovered by 2.36%. American Express (AXP) (+0.87%) and Intel (INTC) (+0.25%) were the other two gainers. Bank of America (BAC) was the biggest loser. It fell 5.06%. Alcoa (AA) (-3.28%), Boeing (BA) (-3.21%), and J.P. Morgan (JPM) (-3.12%) were the other top losers.

Meanwhile, the S&P 500 ($SPX) fell 12.65 points, or 1.17%, and closed at 1,066.95. RadioShack (RSH) was the stand-out in the S&Ps. It rose 15.9% after reporting better-than-expected third-quarter revenue despite it still being lower than a year earlier. It earned $0.30 a share, compared to estimates for $0.31 a share. Crude oil futures continued to struggle at the daily resistance I spoke of at the beginning of last week. They ended the session lower by nearly $2 a barrel at $78.55 (-2.4%).

The Nasdaq Composite ($COMPX) fell 12.62 points, or 0.59%, and it closed at 2,141.857 on Monday.

Nasdaq Composite ($COMPX)


As we head into Tuesday's trade, the indices are dealing with strong support on the 60 minute time frame. Even though the pace is bearish as a result of Monday's decline, this was the second decline on the 60 minute time frame. This creates decent potential for some relief from the selling on Tuesday, but it's important at this point to continue to be extremely cautious on buying. In order for the market to now continue with a larger confirmation for a daily correction there now needs to be a continuation in the change in momentum and ultimately the correction will not confirm until the 50 day sma zone gives way.