Dusting Off My Old Dow 10K Hat... AWW CHOO!

Dusting Off My Old Dow 10K Hat... AWW CHOO!

(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! Well... I suppose that depends on your perspective! As I mentioned in Friday evening's edition, heading into the new week the market's bias was favoring further downside. That downside, however, was a bit more than many had bargained for! The indices once again experienced a larger-than-average gap lower after they continued to slide lower in off-hours trade.

I have spoken a great deal about how to approach such gaps recently, because the market has had more than its fair share of them over the past month. When tracking an opening gap for a bias, the initial step is to measure the highs and lows of the first fifteen minutes of the session. The direction those first 15 minute highs or lows breaks is the direction the market will then favor trending throughout the remainder of the morning. Often the market will give you a heads-up, like it did on Monday when it moved more slowly off the opening lows within a larger all-session base or bear flag that first began to form Sunday evening.

Nasdaq Composite ($COMPX)


After triggering the breakdown, the indices continued rapidly lower into the 10:15 ET correction period. Volume spiked and the correction period held. Given the momentum of the downside move, the market had a difficult time sustaining the reversal off the lows, even though in terms of the price action the indices managed a decent recovery. The downside had not yet established an equal move on a 15 minute all session chart, however, and it left plenty of room for the market to continue intraday. It is difficult to judge this added potential based purely on the charts from intraday price action, but consider that the indices were basing at lows into the open on Monday and take the move off Friday's highs into the gap zone. Then project this middle zone lower to offer the equal or measured move target.

The market's 10:15 ET bounce ran into the 5 minute 20 period simple moving average resistance at about the same time as the 11:15 ET correction period hit. The market slid down this resistance level and then fell into a base into the afternoon. It stepped lower out of that base at about 12:30 ET, but failed to confirm until a second breakdown just prior to the 14:00 ET correction period. This is a typical time in the market for strong moves to take place and the market quickly broke to new lows. The selloff continued until both the S&Ps and Dow hit 5 minute equal move support around 14:45 ET. This also was the equal move level on a 15 minute time frame for the all sessions charts when compared to that afternoon breakdown and continued afterhours selling on Friday. This placed the indices squarely into strong, higher time frame support ahead of the final hour of trade on Monday afternoon.

Dow Jones Industrial Average ($DJI)


By about 14:45 ET the Dow was down 800.06 points with the largest intraday point drop on record, mimicking the losses from just one week prior. Within the final 75 minute of trade, the Dow Jones Industrial Average ($DJI) managed to make back more than half the session's losses. The Dow closed lower on Monday by 369.88 points, or 3.6%, at 9,955. This was the first time the Dow had closed under 10k since October 2004. Bank of America (BAC) closed with the largest losses, down 6.55%, while Alcoa Inc. (AA) lose 5.87%, and General Motors (GM) lost 5.78%. Merck (MRK), Microsoft (MSFT), Citibank (C), and McDonalds (MCD) also all closed with losses over 5%. None of the Dow's 30 components managed to make any gains. The S&P 500 ($SPX) fell 42.34 points, or 3.8%, and closed at 1,056.89. The Nasdaq Composite ($COMPX) dropped 84.43 points, or 4.3 %. It closed at 1,862.96.

S&P 500 ($SPX)


Earlier overseas, the Pan-European Stoxx 600 Index fell 7.6%, for the largest one-day decline on record. Although the President signed in the $700 billion rescue plan passed by the House of Representative on Friday, European leaders failed to reach a consensus on how to cope with the financial crisis it finds itself facing.

Also making headlines on Monday, crude oil futures continued lower by $6.5% to $88.81 a barrel. It is now nearly 40% off its July highs. The national retail price of gasoline also finally continued lower once again from highs of $4.114 a gallon this summer to an average of $3.504 on Monday. As oil prices slid lower, the euro hit a 13-month low against the dollar. The euro to US dollar is at 1.355 currently (11:45 pm ET).

As I mentioned in yesterday's column, the markets are currently in the midst of an exhaustion on on the weekly time frame. We are already experiencing the extension of that move so far this week. The indices had already fallen into the congestion from 2004, which was serving as our larger target. The S&Ps pushed further, but both the Nasdaq and Dow are testing that larger monthly support. I expect the market to experience a larger correction off this zone of support, but since the time frame is quite large, there is a lot of wiggle room in the meantime. It will be very difficult for us to see any strong recovery in terms of price. Upside move will tend to be brief when accompanied with momentum. An example would be the recovery a few weeks ago in both oil prices and the euro. Each was subsequently met with another wave of selling back into the larger support. I think we are in for a bounce in both this week along with the overall market, but we are also wide open for another test of lows later this month or even into early November int he overall market, depending upon how the upcoming correction begins to form.

Market Holds Trading Channel

Good day! As discussed in my last several columns, the market has been in a choppy trading channel on the daily time frame since the 18th. I had been expecting the market to continue to hold that channel at the beginning of this week and so far the market has obliged. On Monday the indices had tested the upper end of that channel on light volume and with slowing momentum. This allowed the indices to break lower into the close. The pattern was large enough on the 15 minute time frame that it was also able to continue into Tuesday morning, bringing the market back to the lower end of that larger channel within the first 90 minutes of trade.

Although Tuesday's session began with the weaker bias thanks to the 15 minute reversal pattern which had triggered the prior afternoon, the selling did not increase again until the Conference Board released its April consumer confidence reading. The consumer confidence index fell from an upwardly revised 65.9 in March to 62.3 in April, which is its lowest level since March 2003. It was higher than the 61.0 expected, but it was not enough to hold up the the market and a second wave of selling began immediately.

In other news on Tuesday, U.S. home prices continued to fall, down 2.6% from January according to the Case-Shiller home price index measuring 20 key cities. This means that for the past year home prices have fallen a record 12.7%. Prices are expected to continue to decline with the largest losses in Las Vegas and Miami, both of which have fallen by more than 20% in the past year.

Following the morning's economic data, the downside continued in the market until the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) both hit their 15 minute 200 period simple moving averages at the same time as the 10:45 ET correction period. The Nasdaq Composite ($COMPX) found support a bit sooner at the opening lows at 10:30 ET. The reaction off these support levels was decent, but not extreme. The Nasdaq experienced the strongest reaction, popping quickly to the 5 minute 20 sma. The greater strength throughout the morning, as well as this earlier and stronger move off support, made it easier for the Nasdaq to show the greatest strength throughout the afternoon as well.

After the initial move off support took place, hitting highs around 11:30 ET, the market began to pull back once again. This time, however, the momentum was very gradual and volume dropped on the pullback, creating a nice 5 minute buy setup that triggered early on in the afternoon. A continuation of this setup took place out of the 13:00 ET correction period and took the indices through their 15 minute 20 sma resistance levels. The Nasdaq also used this breakout to move to new highs on the day. It rallied all the way back into the zone of Monday's highs.

The market stalled once again shortly after 13:30 ET, but the correction was once again a mild one. The 5 minute 20 sma held as support, as did the lower trend channel, and at 14:30 a final wave of buying took place, bringing the S&Ps and Dow back into Monday's close as price resistance. This hit with the 15:00 ET correction period. I had been watching for a final move higher into the close, but the market rounded off at highs before pulling back and nullified that possibility. Although the 5 minute 20 sma and lower trend channel stalled the move on the downside at 15:30 ET, the roll over off highs made it easy for the support to break and the market to continued lower into the close and afterhours trade.

Both the ES (S&P 500 Emini futures) and YM (mini-Dow futures) were able to return to the zone of the intraday lows at about 16:15 ET, although the Nasdaq still managed to hold up well and only retraced to the 38% fibonacci level. The upside was then able to resume and the indices futures performed well into the late evening hours.

At the closing bell, the Dow had fallen 39.81 points, or 0.3%. It ended the day at 12,831. The S&P 500 lost 5.43 points intraday, or 0.4%, and closed at 1,390. The Nasdaq Composite gained 1.7 points, or 0.1%, and closed at 2,426. Top sectors included airlines, telecommunications, health care, and technology. Sectors performing poorly on Tuesday included gold, oil, pharmaceuticals, and natural gas.

Several big-name companies reported earnings ahead of the open on Tuesday, but they had very little impact on the market as a whole as the session began. MasterCard (MA) more than doubled its profits, reporting a 29% increase in revenue. It gapped sharply higher to break the upper trend line of its daily uptrend channel and closed higher by 13% (+$31.48). Corning Inc. (GLW) also rallied into Monday's open after it tripled its first-quarter profit on LCD sales. It pulled back off highs about 35 minutes into the session, but still gained 3.3% (+$0.85) on the day. BP (BP) has also been on a run lately with oil hitting highs and it jumped another 4.6% (+$3.20) on Monday after it beat analyst estimates.

Offsetting the gains made by the likes of MA, GLW, and BP was the rejection of Merck's (MRK) cholesterol drug Cordaptive by the Food and Drug Administration. MRK has been suffering a sharp decline since the beginning of the year and it took a hit with another 10.4% (-$4.30) loss by the end of the trading day on Monday after trying to find a foothold over the past month at lows.

Wednesday's session brings with it another Fed rates announcement. Expectations are for another quarter-point rate cut. Odds are beginning to increase that the Fed will pause its rate cut trend into the summer. There is some speculation that they will begin to do so on Wednesday, but overall most anticipate this to begin with the next meeting instead.

With any Fed day, however, the market tends to begin the session with an upside bias intraday and then a slowdown over noon and into the rate announcement. Then the market will experience several reactive waves, typically in groups of three with an initial reaction, followed by a counter-reaction, and then continuation of the initial move. Use a great deal of caution in pre-Fed and immediate post-Fed trade. The market is still in the trading channel it has been stuck in for the past two weeks. I am favoring a sharp breakdown once the channel gives way, but it can still hold for a few more days if there is not an extreme negative reaction to the Fed.

Dow Jones Industrial Average ($DJI)



S&P 500 ($SPX)



Nasdaq Composite ($COMPX)