Good day! The markets had their worst day in 6 weeks on Wednesday. Volume was light as the month began, despite attempts to push through the 100 day moving average in the S&P 500 and Nasdaq 100. The volume finally picked up somewhat mid-week. This took place on sharp selling. In yesterday's column I included a chart that depicted the price pattern the indices were forming since pulling up off the early-July lows that favored the breakdown we experienced on Wednesday. I've left the chart in place for today to compare today's action to.
As you can see on the intraday chart of the Nasdaq from the past six weeks, a series of three slightly higher highs were formed on the indices since mid-July. In the third push, there were also three smaller yet slightly higher highs this month. This trending action alone will indicate an extended trend with a high probability for a sharp breakdown. The lower trend line rose more quickly than the upper trend line over the past several weeks, however, creating the rising wedge shown below. Combined with the light volume, this add even more weight to a downside bias. Each of the slightly higher highs serves as a bull trap, while the light volume indicates a lack of participation.
Dow Jones Industrial Average
While I was already watching for weakness last week, it wasn't until Tuesday that the market began to offer confirmation. The indices gapped sharply lower into Tuesday's open. Despite a recovery following the FOMC meeting, the closure of the gap served as resistance and the indices turned lower afterhours, quickly returning to the intraday lows. The index futures congested from approximately 20:45 ET on Tuesday into 1:00 a.m. ET on Wednesday. This congestion gave way to even further selling in premarket trade. A series of trading ranges, followed by continuation moves remained the modus operandi for the market until about an hour after Wednesday's closing bell.
The strongest intraday selling took place in the premarket and early morning hours on Wednesday. The market did offer a couple of buy setups. As expected, however, they were of a daytrade/scalpish nature. The 13:00 ET correction period held with the indices hitting slightly lower lows at that time as compared to the 11:15 ET lows. This created a 2B reversal pattern on the 5 minute time frame. It was followed by a 5 minute Phoenix as the indices based along the 5 minute 20 sma before breaking higher. This completed a two-wave correction and the market turned lower once again off 15 minute 20 sma resistance into the final 90 minutes of the day.
The Dow Jones Industrial Average ($DJI) posted a loss of 265.42 points, or 2.49%, and closed at 10,378.83 on Wednesday. All of the Dow's 30 index components posted a loss for the day. The downside leaders were Alcoa (AA) (-6.08%), Boeing (BA) (-4.40%), Caterpillar (CAT) (-3.79%), Hewlett-Packard (HPQ) (-3.69%), and JP Morgan (JPM) (-3.57%).
The S&P 500 ($SPX) fell 6.73 points, or 0.60%, and closed at 1,121.06. Only 5 stocks in the S&P 500 managed to eek out gains. These included CareFusion (CFN) (+8.69%), Macys (M) (+5.88%), Western Digital (WDC) (+2.83%), CF Inds. Holding (CF) (+0.90%), and MetroPCS (PCS) (+0.47%). The biggest losers were Office Depot (ODP) (-8.18%), Allegheny Tech. (ATI) (-7.58%), Hartford Finl. (HIG) (-7.54%), Rockwell Automation (ROK) (-7.09%), and Titanium Metals (TIE) (-7.04%).
The Nasdaq Composite ($COMPX) ended the session lower by 28.52 points, or 1.24%, on Wednesday and it closed at 2,277.17. In the Nasdaq-100, only Seagate Tech. (STX) (+1.62%) and Research In Motion /(RIMM) (+-.46%) posted a gain. The biggest losers were Logitech (LOGI) (-6.71%), Broadcom (BRCM) (-6.14%), and Sandisk (SNDK) (-6.07%).
My bias over the next week continues to be in favor of further corrective activity off Monday's highs. The 30 minute time frame is oversold, however, following a push lower in the index futures after Wednesday's close. This was a result of earnings out of Cisco Systems (CSCO) that beat estimates, but fell short on revenue expectations. So, while the larger daily bias remains bearish, the 15-60 minute charts are favoring a reprieve from the selling pressure intraday. The most ideal scenario for the bears will be a congestive type of move with only gradual price correction until the 30 minute 20 sma catches up. This would serve to trigger another short on that time frame and break the indices through 50 day sma support.
Note: Unless otherwise stated, the index action described in this article relates to the E-mini 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.
Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.