Markets Hit Upper Channel Resistance

Markets Hit Upper Channel Resistance

(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 had a stellar performance on Monday coming out of the weekend's G-20 meeting. That upside continued into Tuesday morning with the stronger-than-average upside momentum easily returning the indices to the upper end of the daily trading range that has been in place over the past several months. The upper end of the range in the Dow Jones Ind. Ave. and the previous daily highs in the Nasdaq both served as strong resistance. They hit between 9:45-10:45 ET. The momentum on the buying slowed going into the resistance and created a Momentum Reversal™ pattern on a 5 minute time frame. The reversal triggered soon after 10:30 ET and led to the strongest move of the day with a sharp downside correction on the 5 minute time frame heading back into the morning lows.

Dow Jones Industrial Average ($DJI)


The pace of the selling slowed going into morning lows and the 11:00 ET correction period. Between 11-11:15 the correction periods shift, so we will sometimes see strong reversals at 11, while at other times the reversal itself will begin closer to 11:15 ET. That was the case on Tuesday as well. The shifting momentum between these two time periods allowed the market to bounce quickly into the 5 minute 20 period moving average. The extended daily, however, did not yet allow for a continuation of the reversal to form and the market went for a second test of intraday lows.

Slightly lower lows in the S&P 500 and Dow Jones Industrial Average created 2B reversal patterns at 12:30 ET. This is a type of bear trap and led to a bounce into the early afternoon. The 5 minute 20 sma zone once again served as resistance, but this time the market was able to hug that resistance level with declining volume. These two traits are typical in a Phoenix™ formation and created a strong buy setup on a 5 minute time frame. The setup triggered right out of the 14:00 ET correction period, which is often the strongest one of the day. The buying continued until the indices retested the zone of the morning highs, but that resistance was followed by a pullback into the close. The pullback was enough to leave the results mixed for the day in the indices.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) rose 20.03 points, or 0.20%, on Tuesday to close at 10,246.97. The financials led the Dow. Bank of America (BAC) rose 1.65% and American Express (AXP) climbed 1.61%. Boeing (BA) was the biggest loser. It fell 2.01%. Cisco (CSCO) lost 1.42%, while Du Pont (DD) fell 1.29%.

Meanwhile, the S&P 500 ($SPX) fell 0.07 point, or 0.01%, and closed at 1,093.01. Priceline.com (PCLN) was the top gainer. It rose 17.55% after reporting better-than-expected earnings and guidance. Monsanto (MON) broke sharply higher intraday on earnings as well and closed higher by 5.23%. MBIA (MBI) was the biggest loser in the S&P 500. it fell 26.67%.

The Nasdaq Composite ($COMPX) fell 2.98 points, or 0.14%, and it closed at 2,151.08 on Tuesday. Research in Motion (RIMM) was amongst the strongest stocks in the Nasdaq-100. It climbed 3.43%. Electronic Arts (ERTS) was the biggest loser in the Nasdaq. It fell 6.35%.

Nasdaq Composite ($COMPX)


It's a fairly light week for economic data, but according to the National Association of Realtors on Tuesday, the median price for a single-family home fell 11.2% to $177,900 year-over-year since the third quarter of 2008. Existing home sales are up 11.4%.

My outlook for the week remains the same as yesterday. The upside momentum on the daily time frame will make it difficult for the overall market to correct quickly. The previous highs in the S&P 500 and Nasdaq remain strong resistance, as will the upper end of the daily trend channel in the Dow, but the market will favor rounded highs for a correction from the buying as opposed to a sharp reversal.