Market Disappoints

Market Disappoints

(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! As I was writing yesterday's column, the index futures were testing key resistance into midnight at 50% and 61.8% Fibonacci retracement levels and 15 minute 200 period simple moving averages. The overall pace of the really was more gradual than the previous descent, but we had seen such moves correct and then pick up greater steam on the second push. This had been the case heading into Tuesday morning. In yesterday's column, I pointed out that in order to see a break from the larger 60-minute trading range, ideally this slower momentum would hold under that 61.8% retracement. Even though the index futures still put in that second attempt to push higher after correcting from that zone into the 6:00 am ET correction period, the second rally out of that time zone was not able to break through that resistance zone.

Dow Jones Industrial Average ($DJI)


The Nasdaq-100 futures showed the greatest premarket strength, but when the S&P 500 and Dow Jones. Ind. Ave. futures pulled higher, they held the 15 minute 200 sma resistance. Then they created a two-wave congestion going into the opening bell. This means that they pulled back off the resistance, put in a higher low, bounced for a second move higher into 9:30 am ET, but with another smaller move. These two waves created the short trigger following the opening bell.

The market held the zone from the premarket action until after 10:00 ET. The bottom gave way at 10:20 ET with another extreme selloff reminiscent of Wednesday's morning collapse. As on Wednesday, the sharp selling was followed by continued downside, but at a more gradual pace. Support held at 11:45 ET when the indices hit equal move targets as compared to the previous day's descent.

The momentum continued to shift along the 5 minute 20 period simple moving averags before triggering a momentum reversal buy strategy coming out of the 13:00 ET correction period. The action was the strongest in the Nasdaq with a second wave of buying on the 5 minute time frame taking place at about 14:15 ET. The indices hit the 15 minute 20 period sma, however, and were unable to break through that zone, as well as the zone of price resistance caused by the morning's momentum shift. This resulted in a pull back to the lower end of the afternoon range in the final 90 minutes of trade.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) ended the session on Thursday at 10,389.88 with a loss of 213.27 points on Thursday, or 2.01%. Despite the extreme selloff, McDonalds (MCD) (+0.30%) and Travelers (TRV) (+0.04%) still managed to post small gains. MCD reports earnings ahead of Friday's open. At the other end of the spectrum, however, were major losses. This was particularly the case in the financials. J.P. Morgan (JPM) fell 6.59%, while Bank of America (BAC) shed 6.19%. Other stocks that are linked strongly to the dollar were also hit hard. As the dollar rose, Caterpillar (CAT) fell 4.87%. Alcoa (AA) lost 6.43%. The U.S. Dollar Index rose to 78.570.

The S&P 500 ($SPX) fell 25.55 points, or 1.89%, and closed at 1,116.48. Metals and materials stocks were the biggest decliners, but there were some areas of strength as well. Lauder Estee Cos. Inc. (EL) was the strongest S&P 500 component on Thursday. It broke higher on the weekly time frame to close with a gain of 9.16%. Ebay Inc. (EBAY) followed with a gain of 8.55% after it posted fourth-quarter earnings late Wednesday. Total Sys. Svcs. Inc. (TSS) was the worst-performer. It fell 11.93%. It was followed by a 9.90% loss in Legg Mason Inc., and a loss of 8.84% in United States Steel Corp. (X). Crude oil futures ended the session at $76.08.

The Nasdaq Composite ($COMPX) fell 21.56 points, or 1.12%, and it closed at 2,265.70 on Thursday. Seagate Technology (STX) was the best-performer in the Nasdaq-100. It rose 9.74%. EBAY was the second-best performer. Xilinx Inc. (XLNX) came in third with a gain of 5.47% after bouncing off the 100 day moving average. The biggest losers were Joy Global Inc. (JOYG) (-6.94%), Garmin Ltd. (GRMN) (-5.50%), and Logitech Intl. (LOGI) (-4.55%).

Nasdaq Composite ($COMPX)


Thursday's volume was the highest we have seen in several months, showing conviction in the selloff as the bulls paniced and raced to attempt to protect gains earned over several weeks that were given back in only a fraction of that time. Even though the markets triggered a technical sell setup, Obama's proposal for limiting the types of risk, as well as the size of that risk, that financial institutions can expose themselves to was cited as a major contributing force that allowed the financials to lead the downside on the session. Some of the examples that were given included prohibitions against allowing commercial banks to trade their own accounts as well as owning or investing in hedge funds.

The bulls were already skittish heading into the day, so even whiff of controversial news easily helps drive the market lower. In order for confirmation of a larger correction to occur, as opposed to this merely being another two-wave pullback on the 60 minute time frame, we need to see another slower rally or continuation of the momentum shift. Ideally, this will mean that the market does not attempt to break the previous highs and that any correction of Thursday's selloff holds that level. At this point, however, it is likely that this will be the case.

Even if the market managed to turn back around, the price action suggests that any attempt to push to new highs next week will fail, although another wider trading range is still possible. Buy setups in securities that are heavily influenced by the direction of the overall market should be met with increased caution, particularly for those who are swingtrading.