Market Selloff Hits a Bump

Market Selloff Hits a Bump

(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 major indices were nearly in free fall mode throughout the better part of last week. In fact, they ended lower on Friday with their worst weekly losses since hitting last March's lows. As I mentioned this weekend, this action increased the overall risk on Monday for traders that focus upon setups forming on time frames greater than the 5 minutes charts. The pace of the decline will make a strong and sustainable recovery difficult this week, while the degree of the selloff so far has limited downside potential until the markets have a chance to catch their breath.

The index futures traded in a range throughout the evening on Sunday and into the early morning hours on Monday. They broke higher at approximately 2:45 am ET. This is not a typical correction period for the markets, but the breakout confirmed with an increase in volume heading into 3:00 am ET. Three waves of buying on a 5 minute time frame took the indices into resistance at the 6:00 ET correction period. The market reclaimed the gain made during this breakaway rally by 8:00 am ET and then began to congest heading into Monday's opening bell.

Dow Jones Industrial Average ($DJI)


Two waves of correction off the 8:00 am ET support zone set the tone for a bearish open on the 5 minute charts despite a minor gap higher. This range continued with declining volume into 10:00 am ET, at which point the S&P 500 and Dow Jones Industrial Average broke sharply lower. Despite the overall weakness, the Nasdaq managed to hold its own range awhile longer. In addition to the two-wave correction in the premarket, it formed another comparable pattern from the opening bell into 10:30 am ET.

The indices resumed their selloff out of the 11:00 ET correction period. Although the pace of the selling was strong, volume failed to confirm it. Once the gap zone closed, the indices turned around. The entire morning selloff created a Phoenix™ buy setup on the 15 minute time frame in both the S&Ps and Dow. Notice in the charts that both indices slid lower at an equal distance from their 15 minute 20 period simple moving averages. When such a channel breaks, it offers a high probability setup for at least a two to one ratio on reward versus risk. This potential increases if the pullback that hugs the moving average retraces less than 50% of the upside move off lows as it hugs that resistance.

This was not the case in Monday's session. The retracement had nearly closed the morning's gap, so this created greater resistance at the early morning highs when the larger Phoenix™ setup followed through. It did end up hitting the two to one reward level, but just barely. Those morning highs held well and the market pulled back once again in the final hour of trade. This pullback meant that the initial gap plus the afternoon rally created a two-wave continuation pattern for a short into the close out of that 15:00 ET correction period and into afterhours trade.

The indices went a bit crazy afterhours on Apple's earnings. Even though prices returning to closing levels by 18:00 ET, the index futures sold off once again into midnight before finding some support into the 2:00 am ET correction period.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) ended the session on Friday at 10,196.86 with a gain of 23.88 points, or 0.23%. Intel (INTC) was the best-performer with a gain of 2.06%. Caterpillar (CAT) came in second with a gain of 1.64%. General Electric (GE) rose 1.61%. At the opposite end of the spectrum was a loss of 2.07% in American Express (AXP), a 0.71% loss in United Technologies (UTX), and a 0.65% loss in Kraft (KFT).

The S&P 500 ($SPX) rose 5.02 points, or 0.46%, and closed at 1,096.78. Ciena (CIEN) was the top-performer in the S&P 500, rising 6.70%. A K Steel Holding Corp. (AKS) followed with a gain of 5.35%, while Ford (F) rose 4.85% after it announced that it would be adding 1,200 new jobs in Chicago. Capital One Financial Corp. (COF) was again a top loser, falling 3.78%. International Game Technology (IGT) fell 3.20%. Southwest Airlines (LUV) fell 3.08%.

The Nasdaq Composite ($COMPX) rose 5.51 points, or 0.25%, and it closed at 2,210.80 on Monday.Liberty Global Inc. (LBTYA) had the best performance in Monday's session in the Nasdaq-100. It rose 8.11%. Seagate Technology (STX) came in at a distant second with a gain of 2.83%. Apple Computers (AAPL) came in third with a gain of 2.70 ahead of earnings. It is expected to announce a new tablet computer on Wednesday and investors are anxiously awaiting the news conference. The worst performers in the Nasdaq-100 were Warner Chilcott (WCRX) with a loss of 2.81%, Activision Blizzard (ATVI) with a loss of 2.41%, and Starbucks (SBUX) with a loss of 2.23%.

Crude oil futures settled higher by 72 cents at $75.26 a barrel.

Nasdaq Composite ($COMPX)


My outlook for today's session is not much different that yesterday. The market is still extended on the downside, but the momentum has not shifted enough at lows heading into 3:00 am ET to attract me to long positions for anything greater than a daytrade on the shorter, intraday time frames, such as the 5 minutes charts that triggered the 2:00 am ET 2B reversal in the Nasdaq futures this morning. Earnings season is picking up though, so we should be able to find a number of momentum plays in stocks that will not be as heavily influenced by the overall market. The 10:00 am ET consumer confidence data will be one of the main things to keep an eye on intraday. Tuesday is also the first day of a two-day Fed meeting. This will help to keep volatility lower until Wednesday's rates announcement.