Markets Tease Buys and Sellers

Markets Tease Buys and Sellers

(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! After more than a week of strong buying at the beginning of November, the pace shifted over the past week as the indices pushed into the upper end of the daily trading channel that has been in place over the last several months. That upper channel level is shown in dark red on the daily charts below. The 50 day simple moving average is currently serving as the lower end of the uptrend channel.

If you look back over the previous tests of this upper channel, what you will notice is that as the resistance zone hit, the buying slowed. This was true even when the indices pushed to slightly higher highs. This is a common way for the market to start to correct after stronger-than-average trend moves. It increases the risk for both buyers and sellers who are looking to hold positions as swingtrades (3-10 days). This is because there will often be a lot of overlap in price from one session to the next and it is easier to get flushed out of positions only to see them head in the anticipated direction shortly after a stop hits. This was the risk I warned about in last week's columns and we can see this action starting to play out.

Dow Jones Industrial Average ($DJI)


Thursday offered the first confirmation that the pace was shifting. The 60 minute trend channel broke that morning. This can be seen most clearly by adding a 20 period simple moving average to that time frame. It had held that level throughout the rally that kicked off at the start of November in the Dow. It peaked on November 11th. Since then the indices have been correcting from that run, but the pace of the upside made a rapid reversal more difficult and the correction has been primarily through time so far, as opposed to price.

On Thursday the strongest selling took place in the morning. The intraday momentum then shifted in the afternoon. The indices had three waves of downside, which can be seen clearly on the 15 minute charts. The correction times between each of the waves of selling last approximately the same amount of time. This left the trend extended into the close. The market easily broke that downtrend channel afterhours and the market continued to creep higher until the 7:00 am ET correction period. The premarket trend channel on the upside broke lower at that point, but the market still managed to open with a gap higher.

The premarket downtrend continued through the opening bell, but a small bear flag formed at the open and appeared as congestion on the 5 minute charts intraday. A final leg of downside on the selloff that began at 7 took place going into 10:00 am ET. This leg closed the gap in all three of the major indices. The S&P 500 was the weakest and the selling nearly took the index back to Thursday's afternoon lows. The general zone of support held, however, and the market rebounded once again. Although trading was choppy throughout the first hour of the day, by 10:30 am ET the indices were breaking to new highs on the day.

S&P 500 ($SPX)


The intraday trend action became smoother once the indices broke through the early morning highs. The new intraday uptrend continued into the 11:00 ET correction period. At that point the market fell into a trading range along the day's highs. Volume dropped off as the market based. The base itself had two smaller waves of correction off the day's highs. This is a typical corrective pattern within a larger trend that will lead to a continuation of that trend. The 5 minute 20 sma served as support at noon and all of these factors came together to create a strong continuation buy setup out of the 12:00 ET correction period. This led to the final wave of buying for the trend and it represented the third leg of upside on an intraday time frame for the indices. On the intraday charts the first leg up began off Thursday's lows into Friday's opening bell and does not take into account the post and premarket data.

The pace shifted in the market as the afternoon wore on. Rounded highs led to a break int he uptrend between 13:00-14:00 ET and a short triggered as the 5 minute 20 sma zone gave way. The selling ended only as the Dow hit the 38% Fibonacci retracement level from Thursday's downtrend. This was also approximately the 62% retracement off the highs intraday. These support levels hit with the 15:00 ET correction period and the market was able to hold this zone for the remainder of the session. A small Phoenix™ formed into 15:30 ET that continued the reaction off the support for a bounce into the closing bell.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) rose 73.00 points, or 0.72%, on Friday to close at 10,270.47. 22 of the Dow's 30 index components posted a gain. Disney (DIS) (+4.78%) was the best-performer after reporting better-than-expected earnings late Thursday. McDonald's (MCD) followed with a gain of 2.27%. American Express rose 2.15%. J.P. Morgan (JPM) was the biggest loser. It fell 0.92%. General Electric (GE) was the second-worst performer with a loss of 0.57%. The overall Dow was up 2.5% for the week.

Meanwhile, the S&P 500 ($SPX) rose 6.24 points, or 0.57%, and closed at 1,093.48. Abercrombie & Fitch (ANF) was the best performer in the S&P 500. It rose 10.66% following earnings on Friday morning. Genzyme Corp. (GENZ) was the worst-performer. It fell sharply after the FDA warned that there was the potential for "foreign particle contamination" in several of its products. The overall S&P 500 ended the week higher by 2.3%.

Crude oil futures fell $0.59 a barrel (0.8%) on Friday and ended the session at $76.35 in New York. They were down 1.4% for the week. Gold futures were up $10.10 an ounce on Friday and ended the session at $1,116.70. It was up 1.9% for the week.

The Nasdaq Composite ($COMPX) rose 18.86 points, or 0.88%, and it closed at 2,167.88 on Friday. The Nasdaq ended the week higher by 2.6%.

The market is in a trading range on the 60-minute time frame heading into the new week. Since the indices were able to recover so well on Friday, it continues to leave the door open to higher highs this week, albeit with the slower overall momentum than compared to earlier this month. This would shift the momentum as the market continues to correct at this daily resistance zone from the upper end of the daily trend channel. If the channel does break strongly and does not continue to show a momentum shift, however, then the next main daily resistance is about 11200 in the Dow. Whenever the market has moves like this, I tend to stick to intraday action for the most part unless trading a stock that does not move closely in tandem with the overall market.