Market Takes a Nose-Dive in Final 40 Minutes of Trade

Market Takes a Nose-Dive in Final 40 Minutes of Trade

(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 hit strong resistance nearly a week ago in the S&P 500 and Dow Jones Industrial Averages when the Dow ran into the 10,000 level and both indices struck their equal move resistance levels on the daily time frame as compared to the previous rally back in the first half of September. Both indices are also hitting larger time frame resistance with equal move zones hitting 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 has all created concern for those, such as myself, that have been looking at the market in terms of how much more upside potential it really has here before we see another weekly correction and it has made me hesitant to go beyond an intraday time frame for anything larger than a setup on a 60-minute time frame with multi-day holds becoming more and more rare.

Nevertheless, the market still attempted to push higher on Wednesday. Once again, the move was primarily news-driven as we move into the middle of third quarter earnings season. It was also more limited in scope, with the Nasdaq leading the upside thanks in large part to continuing momentum following Apple's (AAPL) earnings on Monday.

Dow Jones Industrial Average ($DJI)


The pace of the buying faltered as the indices hit the 10:15 ET correction period, but the market still pushed for a slightly higher high to help adjust the pace of the buying into the 10:45 ET correction period. This also brought the indices into stronger resistance on the 15 minute time frames at prior highs from Monday for the S&P 500 and Dow and better equal move resistance intraday in the Nasdaq as compared to Monday's morning rally. The slightly higher highs created a 2T reversal strategy by forming a type of bull trap on the double top. This allowed the market to turn lower more quickly out of 10:45 am ET, although the overall pace of the initial selling was still not stronger than the buying and thus created greater potential for a longer trading range going into the afternoon.

A two-wave correction off the morning highs brought the indices into support at the 15 minute 20 period simple moving average in the early afternoon. At this point the larger trading range confirmed and volume dropped off substantially. Attempts to push higher in the afternoon, even out of the traditionally strong 14:00 ET correction period, were met with failure due to the larger trend extension on the upside in the overall market on the 60 minute and daily time frames. Instead, the indices crept higher along the 15 minute 20 sma zone. This formed an Avalanche™ short setup that triggered off a 5 minute high into the 15:00 ET correction period. It confirmed the trigger about 20 minutes later when the lower end of the 15 minute trend channel that had been in place throughout the afternoon broke lower. This led to a more traditional short trigger and the momentum quickly built upon itself.

A lot of speculation went into the reasoning behind Wednesday's afternoon selloff. As we can see, there was a strong technical explanation for the market's retreat and buyers had already become more and more wary in recent weeks. Nevertheless, several things still to take note of were an afternoon call by bank analyst Richard Bove for a sell on Wells Fargo (WFC) (strong selling began at 15:10 ET in WFC), computerized selling programs at the 1,100 level in the S&P 500 (which took place into the 10:15 am ET correction period), an announcement by WalMart (WMT) that they would be implementing massive holiday price cuts (selling began in WMT around 13:30 ET), and the government's intervention in cutting executive salaries at several major companies.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 92.12 points, or 0.92%, on Wednesday to close at 9,949.36. Drug shares, financials, and retailers led the downside in the Dow. The top decliner was Merck (MRK), which fell 3.08%. J.P. Morgan (JPM) fell 3.00%, while Bank of America (BAC) fell 2.94%. Pfizer (PFE) fell 2.90%. WalMart (WMT) also took a bit hit after it announced its latest prices slashing plans going into the holiday season. WMT is the Dow's second worst performer on the year and ended the session lower by 2.07%. The top gainers were Verizon (VZ) (+0.80%), Microsoft (MSFT) (+0.80%), and Kraft (KFT) (+0.70%).

Meanwhile, the S&P 500 ($SPX) fell 9.66 points, or 0.89%, and closed at 1,081.40. Despite daily resistance levels, crude oil hit a record high for the year-to-date on Wednesday and closed higher at $81.37 a barrel after ending at $79.12 on Tuesday, but it wasn't enough to hold up the energy sector overall. The sector still lost ground in the late day sell-a-thon, along with materials and consumer discretionary shares which fronted the day's losses in the S&Ps. The U.S. Dollar Index closed slightly lower at 75.110 after ending the day on Tuesday at 75.730 with the Euro up slightly at $1.5022.

The Nasdaq Composite ($COMPX) fell 12.74 points, or 0.59%, and it closed at 2,150.73 on Wednesday.Apple (AAPL) made waves. It had gapped sharply higher on Tuesday following strong earnings the afternoon before and then fell into a range throughout the remainder of the session. This range broke strongly higher on Wednesday morning and by the afternoon it was trading at an all-time high of $208.71 a share, although it also fell back sharply in the afternoon and ended the session at $204.92 with a gain of 3.1% on the day. Year-to-date, shares of AAPL are up 140%. Yahoo (YHOO) also had a strong session and closed higher by 2.9% after it beat third-quarter earnings estimates.

Nasdaq Composite ($COMPX)


This week, 75 of the S&P 500 index components are posting earnings, as well as 11 Dow components. Top names to keep an eye on will be 3M (MMM), AT&T (T), Dow Chemical (DOW), McDonald's (MCD), and Merck (MRK) on Thursday; and Microsoft (MSFT) on Friday.

The strong momentum on the late-day breakdown in the indices on Wednesday afternoon was enough to offer initial confirmation of the start of a larger correction on the 60 minute and daily time frames by breaking through the lower end of the trend channel in both the S&P 500 and Dow Jones Industrial Average. The increases the odds that we will continue to see further corrective action into the weekend, even if it's just through a trading range. Slower waves of intraday upside and a break in the 50 day moving averages will be necessary to confirm a larger weekly correction.


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