Market Posts Modest Gains After Sharp Mid-day Selling

Market Posts Modest Gains After Sharp Mid-day Selling

(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 continued to experience strong volatility on Monday as anticipated. The session began with very little fanfare, but started to head higher ahead of the 10:00 ET economic data. Unlike the disappointing data that ended the week on such a sour note with a loss of 250 points in the Dow, the market initially welcomed Monday's data. The ISM Manufacturing Index came in at 55.7 for October, better than economists' expectations of 53.0 and up from 52.6 in September. Anything over 50 indicates expansion. Additionally, the employment index rose to 53.1, which is its highest level since April 2006.

Dow Jones Industrial Average ($DJI)


In other news on Monday, according to the National Association of Realtors, pending home sales were up 6.1% in September for a year-over-year increase of 21.2% since last September. A large chunk of this increase was attributed to the tax credit benefits given to first-time homebuyers, but construction spending was also higher.

This was just a taste of the week's economic data. At the forefront of the news will be interest rate decisions. On Tuesday the Federal Reserve in the United States kicks off a 2-day interest rate meeting. They will be announcing their decision on key federal funds rate on Wednesday at 14:15 ET. The FOMC is expected to leave them unchanged, but all eyes will be upon the wording of its accompanying statement regarding whether or not there is the hint of a rate increase in the near to intermediate future, which would most likely boost both the dollar and oil. This possibility can merely be implied if the statement fails to include wording such as keeping rates low for an "extended period". The Reserve Bank of Australia, the Bank of England, and the European Central Bank will also be making their own announcements this week.

Monday's economic data was initially met by a huge sigh of relief. The indices had been forming a momentum reversal pattern on the 15 minute time frame following sharp selling throughout the first half of the day on Friday and slower selling into Friday's close. This triggered between 10-10:15 am ET. The 10:00 data created a 1-2-3 bar continuation pattern on the upside on a 5 minute time frame and the indices easily recovered half of Friday's losses. Thursday's opening lows and the 5 minute 200 sma served as resistance on the rally. The initial move was sharp, but as the market tested that resistance zone more tightly, the pace of the buying slowed and a smaller momentum reversal (this time in favor of a short) formed on a 5 minute time frame.

S&P 500 ($SPX)


The indices quickly fell back to the 5 minute 20 sma support. This support level hit at the 11:00 ET correction period. Volume dried up over noon as the market hugged the 5 minute 20 sma support. A short triggered for an Avalanche™ out of the 12:00 ET correction period. The selling pace grew on itself over the course of the next hour. It peaked into the 13:00 ET correction period when the indices wiped out all of the morning gains and then some.

The zone from Friday's lows served as support, but the market managed very slightly lower lows at that zone. A 2-wave continuation pattern triggered off a bounce into the 5 minute 20 sma at 13:30 ET that shifted the pace of the selling. It also created a double bottom (2B) reversal pattern into the 14:00 ET correction period. The market recovered in the final two hours of trade, but the strength slowed in the final hour.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) rose 76.71 points, or 0.79%, on Monday to close at 9,789.44. Only 6 of the Dow's 30 index components failed to post a gain, but all losses were under 1%. American Express (AXP) was the biggest gainer, up 2.41%. United Technologies (UTX) was the second biggest gainer. It rose 1.97%. J.P. Morgan (JPM) rose 1.94%.

Meanwhile, the S&P 500 ($SPX) rose 6.69 points, or 0.65%, and closed at 1,042.88. 351 of the S&P's index components posted a gain. Ford Motor Co. (F) was the biggest gainer. It rose 8.29%. Coventry Health Care Ind. (CVH) was the second biggest gainer, up 5.40%. Denbury Res. Inc. (DNR) was the biggest loser in the S&P 500. It fell 10.34%. Crude oil futures ended the session higher by $1.06 at $78.06.

The Nasdaq Composite ($COMPX) rose 4.09 points, or 0.20%, and it closed at 2,049.20 on Monday. 73 of the Nasdaq-100's index components posted a gain. Downgrades in Research in Motion (RIMM) and Palm (PALM) weighed on the tech sector, but the Nasdaq still held up better than the S&Ps and Dow. RIMM was the top loser in the Nasdaq-100. It fell 5.09%.

My market outlook remains the same heading into Tuesday as on Monday: Currently the market is still holding the lows of the daily trend channel in both the S&P 500 and Dow, while the Nasdaq has broken this support level and is now heading into the previous daily low. I am still not expecting the Dow to break its channel early this week, but I am expecting that 100 day sma to still hit this month. The current downside momentum can easily make that happen even sooner than I was initially expecting. The market will continue to have some decent upside moves intraday, but it should be more difficult to sustain multi-day upside moves for awhile without a great deal of overlap from day to day. This will make swingtrades on the upside higher risk and lend favor to shorter-term intraday action.