Trading Remains Light into Tuesday

Trading Remains Light into Tuesday

(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! Trading volume remained light on Tuesday following Monday's Columbus Day holiday. The indices showed some divergence out of the open when both the S&P 500 and Dow Jones Industrial Average fell sharply past Monday's afternoon lows on a 15 minute bear flag. The Nasdaq attempted to follow suit, but it had displayed greater relative weakness the previous afternoon. This left it more extended than the other two indices and it serves as an excellent example of how the mere fact that a security, or index, is weaker to begin with does not mean that it will have the best continuation move on the downside. When an extreme move occurs in a security or index, that security or index can often step aside and let other related issues take the lead. The more extreme the momentum of a move is compared to average, the more difficult it will be to mount a strong continuation of that trend without a substantially longer period of rest than normal.

Dow Jones Industrial Average ($DJI)


All three indices found support from the morning selloff at approximately 10:00 am ET. This is not typically a strong correction period unless accompanied by economic data. It was, however, the same time at which the indices ran into strong price support from last Friday's trading range. When the market breaks higher out of a range, that range itself will serve as support on a pullback.

The descent into the morning lows was a lot more rapid than usual, making it difficult for the market to sustain a rapid recovery right away off the lows. Instead, the market chopped higher into 5 minute 20 sma resistance, based along that level with declining volume, and then broke higher with a stronger-paced move out of the 11:15 ET correction period with a 5 minute Phoenix™ setup.

The market moved strongly to the upside throughout the remainder of the morning until the Nasdaq hit 15 minute equal move resistance and the indices S&P and Dow returned to the zone of Monday's open. These resistance levels corresponded to the 12:00 ET correction period, which the market held very well. The indices rounded off at highs on the smaller 1-2 minute time frames. This allowed the bears to gain the upper hand heading into the early afternoon. An initial wave of selling was followed by a long consolidation on light volume until the second half of the afternoon. The selling pace increased once again into 14:00 ET.

S&P 500 ($SPX)


The afternoon breakdown was good for daytraders, but the market was coming out of a three-wave uptrend on the 60 minute time frame and lacked a decent change in pace on the larger time frames to sustain a strong reversal off the highs on Monday. This placed a limit on intraday follow-through as well and the mid-afternoon breakdown tried to mimic the morning's activities on a smaller scale. After a rapid drop, the market inched higher with choppy trading into the 5 minute 20 sma. The S&Ps were able retest the noon highs, but resistance held into the close.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) ended the session slightly lower by 14.74 points, or 0.15%, on Tuesday to close at 9,871.06. Half of the Dow's index components posted a loss. The largest decliner was Johnson & Johnson (JNJ), which fell 2.43% following disappointing earnings. Pfizer (PFE) was the next largest loser, down 1.87%. Home Depot (HD) was the largest upside winner, rising 1.81%, followed by a 1.47% gain in WalMart (WMT).

Meanwhile, the S&P 500 ($SPX) fell 3.00 points, or 0.28%, and closed at 1,073.19. 195 of the S&P 500 stocks closed higher. Crude oil futures have broken higher out of their weekly triangle and closed at $74.15 a barrel, while gold hit a record and closed at $1,065 an ounce. Health care was one of the major laggards after the Senate Finance Committee passed a health care reform bill. The XLV (S&P 500 Healthcare ETF) was down 1% for the session. The financials also suffered in Tuesday's session. J.P. Morgan Chase (JPM), Goldman Sachs Group (GS), and Citigroup (C) are all due to report earnings this week.

The Nasdaq Composite ($COMPX) fell 0.75 point, or 0.04%, and it closed at 2,139.89 on Tuesday. In the Nasdaq-100, 41 stocks posted gains. Intel (INTC) was higher by 0.44% ahead of earnings, but was up over 4% afterhours following better-than-expected third-quarter results. It also raised its fourth-quarter guidance. It is currently trading at 52-week highs.

Wednesday's session will likely be highly influenced by the financials. JPM reports ahead of the open. The overall bias in the market is still in favor of a larger weekly to monthly correction off this resistance zone, but it won't confirm until the trading channel that has been in place since early August breaks lower. This can be made by connecting the lows to the lows of the past two months. The 20 week simple period moving average is the next major weekly support level and it held the previous correction in June.