Market Holds Daily Resistance Zone

Market Holds Daily Resistance Zone

(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! This week has been a light one for economic data and Thursday's jobs data had little impact on the market. Ahead of the open the Labor Department reported that initial jobless claims fell by 12,000 to a seasonally adjusted 502,000 last week. This is was more than had been expected and is the lowest since January. Continuing claims also fell to a seasonally adjusted 5.63 million. Compared to a year ago, however, initial claims are up 5% while continuing claims are up 51%.

Thursday's session was not a particularly decision one, but the indices did show the first signs of a larger daily price correction after over a week of strong upside. As I spoke of yesterday, Wednesday's session was a very close repeat of the action seen on Tuesday on the 5 minute time frame. The market had turned higher into the close on Tuesday and moved higher Wednesday. This turn to the upside also took place Wednesday afternoon. It continued into Thursday morning out of the 9:15 ET correction period with the Nasdaq leading the gainers.

Dow Jones Industrial Average ($DJI)


Whenever two days play out in much the same manner with one pattern progressing comparably into the next, the indices will not continue to repeat a third time and some shift in momentum will break the cycle. The indices did turn sharply lower like they had in the previous two sessions following the morning rally, but the selling stalled more quickly and held the 5 minute 20 period simple moving average at the 10:15 ET correction period. This was the first major break in the cycle. This time the indices hugged that support level instead of passing right through it as on Tuesday and Wednesday. Volume dried up as the market reacted to the support and crept higher. This indicated a lack of true buying. Two small waves of upside on the 1 minute time frame from 10:15 into the 10:45 ET correction period merely led to an Avalanche™ short setup on the 5 minute time frame.

The market based at lows from the zone of the 11:15 ET correction period into the 13:00 ET correction period. Volume was again light throughout this congestion, which once again suggested a downside resolution to the range. As on Tuesday and Wednesday the market only broke slightly, but the correction off this mid-day low was more gradual and the market was now showing rounded highs on a 60 minute time frame. This placed stronger overhead resistance on the market when it attempted to pull higher in the afternoon.

The 15 minute 20 sma also served as a very strong resistance level because the entire mid-day range was under that resistance zone. A smaller shift in momentum on a 1 minute time frame formed as the indices approached the 15 minute 20 sma zone between 14:15 and 14:30 ET. This change in pace helped the market break lower into the final 90 minutes of trade.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 93.79 points, or 0.91%, on Thursday to close at 10,197.47. Microsoft (MSFT) was the best-performer in the Dow. It rose 0.82%. It was followed by a 0.51% gain in Wal-Mart (WMT) after it reported third-quarter earnings. It beat expectations, but has already been trending rapidly higher for the past two weeks, so when it gapped higher once again, it had a more difficult time continuing with the gap and spent most of the session in a trading range at this month's highs. Despite a handful of gainers, however, most of the Dow components posted a loss. Caterpillar (CAT) was the largest loser. It fell 2.48%. J.P. Morgan (JPM) followed with a loss of 2.3%, while Bank of America (BAC) fell 2.25%.

Meanwhile, the S&P 500 ($SPX) fell 11.27 points, or 1.03%, and closed at 1,087.24. Energy shares were among the worst performers on Thursday. The S&P 500 Energy exchange-traded fund (XLE) fell 2.2%. Early in session the government reported that supplies of crude oil, gasoline, and heating oil were larger than had been expected. Crude oil was weak heading into the session, but continued strongly on the downside with the news. It ended the session lower by almost 3% to $76.94 a barrel.

The Nasdaq Composite ($COMPX) fell 17.88 points, or 0.83%, and it closed at 2,149.02 on Thursday.

Nasdaq Composite ($COMPX)


I have been following gold since the beginning of the week in this column due to its wide following as it makes record highs this month and the fact that the daily time frame was becoming very extended on the upside. This made it a higher risk investment at this point in time even as it makes headlines. It even made yet another new high on Thursday at $1,122.30 an ounce. This took place very early on in the session, however, and gold finally began to show a correction in price and not just by merely slowing its ascent. Once it turned lower in the morning, it spent the remainder of the session in a downtrend and ended the day at $1,106.60 an ounce.

Even though the first signs of a larger daily correction are now in place due to Thursday's weakness int he overall market, the slightly lower lows mid-day in the S&Ps and Dow and slower follow-through on the afternoon breakdown than the morning selling are enough to fail to confirm a larger daily reversal. This could just be the start of a larger shift in momentum at the upper end of the daily trend channel.

How a correction plays out at this zone on the daily time frame will be very indicative of how the market will play out over the next several months. If the indices did pull back sharply into the 50 day sma once again, then a base at the highs would likely form on the daily and weekly time frame for a correction more through time that would have a decent chance to holding this month's lows. If it rounds off longer with slightly higher highs over the next week, then it can pull back more sharply with a more sustainable price correction and have a better chance of breaking this month's lows before it would have a shot at a new monthly high.

It is a good point to watch for stocks that have had weak rallies for swingtrade short (multi-day hold) setups, but be aware that it still might be a couple of days before they show strong follow-through and that can mean sitting through a few days of choppy action. If there is a change in momentum on a 30-60 minute time frame intraday, such as an Avalanche™ on one of those time frames (such as the one circled at 14:30 ET on the 5 minute chart), then it will increase the odds of a sharp breakdown and better daily follow-through.