Wednesday was one of those days in the market that most daytraders dream about. In an environment where the average volume has been on the light side and a great deal of intraday activity has been choppy, Wednesday's session stood out. No, it didn't have a strong trend higher. In fact, it ended the day close to where it began. What it did have, however, were strong and precise swings on the 5 minute time frame with highly regular trend development.
Dow Jones Industrial Average
The index futures were weak in premarket trade on Wednesday. They had recovered some of the losses that took place into Tuesday's closing bell afterhours, but rolled over off highs heading into Wednesday morning. Strong momentum on the downside took over at about 3:00 a.m. ET and the futures market was favoring further downside into Wednesday's opening bell. They had created a two-wave correction off lows beginning at about 4:00 a.m. ET, but managed to pop on the second correction into the opening bell. This provided a rather unexpected close of the morning gap, but the S&P 500 index futures held the resistance at the midnight highs and the indices quickly reverted to their previous bias.
The intraday action was very smooth throughout the session. Once the downside bias kicked in, the S&P 500 and Dow Jones Industrial Average both developed very textbook trend moves on the downside. Three waves of selling into the 11:15 a.m. ET correction period brought the downtrend to completion, but the pace of the selloff meant that a further shift in momentum would be necessary to see price recovery in the afternoon.
The solution was a double bottom. After pulling higher into noon, the market pulled back steadily for a retest of the lows before offering a steady, two-wave correction higher between 13:00-15:00 ET. The trend then continued afterhours with three steady pushes higher into 3:00 a.m. ET on Thursday morning. Once again, this slowing momentum into this early-morning correction period resulted in a strong breakdown and the market is set to open lower on Thursday.
Wednesday's economic data had very little impact on the session's price action, but it wasn't offering much by way of virtual hugs to investors. This week is one that is heavy in housing data and the most recent was Wednesday's report on home prices. According to a report by the Federal housing Finance Agency, U.S. home prices are down 3.3% in July compared to a year earlier. 0.5% of that was in the span of June to July of this year. In June, buyers were still able to take advantage of the tax credit for home purchases, but sales began to falter even before this incentive ended.
Right now there is about a 12.5 month support of homes on the market. Interestingly, however, the energy and mood of those I've been speaking with locally has been starting to shift. I live in southwest Florida, which is one of the places hit the worst by the housing slump, but realtors and rental owners alike are starting to feel more upbeat that things are starting to improve. On Thursday and Friday we will see an even clearer picture of where things stand when the existing and new home sales data is released.
The Dow Jones Industrial Average ($DJI) posted a loss of 21.72 points, or 0.20%, and closed at 10,739.31 on Wednesday. A dozen of the Dow's 30 index components posted a gain on the day, but only one managed to do so by more than 15. In fact, it broke that 1% substantially. Alcoa (AA) climbed 4.74%, while the next-best performer, Merck (MRK), only rose 0.65%. Pfizer (PFE) came in third with a gain of 0.47%. Microsoft (MSFT) (-2.15%), Bank of America (BAC) (-1.68%), JP Morgan (JPM) (-1.60%), Disney (DIS) (-1.48%), and Travelers (TRV) (-1.13%) were the biggest losers.
The S&P 500 ($SPX) fell 5.50 points, or 0.48%, and closed at 1,134.28. Sears Holdings (SHLD) (+5.31%), Alcoa (AA) (+4.74%), Titanium Metals (TIE) (+3.75%), and CF Inds. (CF) (+2.95%) were the top performers in the S&P 500. The worst were Adobe (ADBE) (-19.03%), New York Times (NYT) (-6.52%), Gannett Inc. (GCI) (-6.15%), Biogen (BIIB) (-5.79%), and Akamai Tech. (AKAM) (-4.60%). ADBE came under sharp pressure after it warned about its upcoming November sales forecast, which was 25% less than expectations. It was hit with a slew of downgrades as a result.
The Nasdaq Composite ($COMPX) ended the session lower by 14.80 points, or 0.63%, on Wednesday and it closed at 2,334.55. O'Reilly Automotive (ORL) (+1.,81%) followed Sears Holdings (SHLD) (+5.31%) at the top of the Nasdaq-100 gainers list. Ross Sores also climbed throughout most of the session, posting a gain of 1.80%, while Costco (COST) nearly overtook it with a gain of 1.73%). Adobe (ADBE) (-19.03) and Biogen (BIIB) (-5.79%) were the top losers, followed by Autodesk (ADSK) (-4.26%), and Altera (ALTR) (-4.05%).
My larger bias remains the same as yesterday. We are extended on the daily time frame, which will make it difficult to see strong follow-through on new position on daily and weekly charts to the upside over the next several weeks. A correction into the end of the month is more likely. The market is becoming extended on the downside on the short-term going into Thursday's open, however, so this could easily lead to a choppy day of trade as the market corrects from the stronger-than-average premarket selloff. It will be nearly impossible to establish a strong intraday directional trend that can outpace that drop that began at 3:00 a.m. ET.
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.