Good day! The market took participants for quite a ride on Thursday. The index futures were trading lower ahead of the opening bell. This was the result of strong premarket selling that began in the early morning hours with the open of exchanges overseas. Disappointing PMI readings out of Germany and the overall eurozone left a mark and 3:00 a.m. ET was the key turning point. The futures fell apart at that point and the selloff continued with panache until 5:00 a.m. ET.
As I discussed in yesterday's column: With such a sharp turn to the downside, it is nearly impossible for the market to reverse course with the same momentum. Slower corrections typically follow. They do so in two ways. First, the market can hold the low that follows the rapid decline and then fall into a base or very slow upside move. This is the type of correction that easily leads to another strong breakdown. Alternately, the pace of the selling can slow with the market stepping lower. This shifts the momentum as new lows are made so that by the time a reversal takes place, the latest downtrending action is no longer an extreme momentum move.
Dow Jones Industrial Average
After hitting support at 5:00 a.m. ET, the market didn't not pause for long before attempting to continue lower. New lows were established coming out of 7:00 a.m. ET, which did not offer the market enough time to correct from the previous selloff. Think of such action in terms of an athlete. A runner, for example, must sacrifice speed for endurance and vice versa. This is the case for the market as well. It was only able to establish a slightly lower low before pausing a second time into 8:30 a.m. ET. At that point the sellers received some extra help from the Labor Department's most recent jobs data. Initial jobless claims had been expected to remain unchanged for this past week, but they rose instead by 12,000 to 465,000 instead for the week ending on Sept. 18. This created a third push lower for another slightly lower low. As those of you who follow my column regularly know, this is one of the main criteria for a setup I call a Momentum Reversal™ as shown in green (2) in FIGURE 2 below.
The premarket shift in the index futures allowed the market to turn higher going into the opening bell. By correcting through a shift in the downside momentum, the indices were able to pull quickly to the upside. This would have been exceptionally difficult without such a momentum shift. Even when this pattern forms a strong reversal, however, the level at which the prior drop began will serve as resistance when that drop is stronger-than-average. This hit shortly before noon and corresponded to prior 15 minute highs on the Nasdaq and the S&P's 5 minute 200 period moving average (3). Once again, however, the stronger-than-average momentum meant that the market could not easily reverse sharply to the downside. The initial pullback was slow and created a trading range. Within that range, the bias shifted to favor the bears. This bias was cinched with the market moved slowly off the lower end of the afternoon range going into 14:00 ET. The short trigger took place shortly afterwards going into 14:30 ET.
The afternoon selloff was another sharp one. It continued for the final 90 minutes of the day. By the time the closing bell rang the S&P 500 and Dow Jones Ind. Ave. were all the way back at the morning lows. This zone held as a strong support level similar to how earlier highs had held as resistance for the morning rally. Although the buying did pick up somewhat afterhours, the correction was not the same as during premarket trade. The index futures pivoted off the low that followed the sharp afternoon decline and did not break to slightly lower 5 minute lows. This created the other scenario I wrote about at the beginning of today's column whereby a slower climb followed the selloff. The afterhours rally will become the second wave of a correction off the 1120 zone in the ES (S&P 500 e-mini futures) on the 30 minute charts. This leaves the bias in favor of the bears heading into Friday. The zone between the lows of Sep. 15th and 16th will serve as the next support level intraday (1110-1115).
The Dow Jones Industrial Average ($DJI) posted a loss of 76.89 points, or 0.72%, and closed at 10,662.42 on Thursday. Only four of the Dow's 30 index components managed to post a gain. They included Hewlett-Packard (HPQ) (+1.52%), Alcoa (AA) (+0.34%), Travelers (TRV) (+0.13%), and Caterpillar Inc. (CAT) (+0.11%). Disney (DIS) (-2.56%), General Electric (GE) (-2.18%), JP Morgan (JPM) (-2.10%), Boeing (BA) (-1.96%).
The S&P 500 ($SPX) fell 9.45 points, or 0.83%, and closed at 1,124.83. Red Hat Inc. (RHT) (+9.03%), Washington Post (WPO) (+4.31%), New York Times (NYT) (+4.30%), and MEMC Electronic Materials (WFR) (+3.97%) were the best performers in the index on Thursday. RHT was the top tech. stock in the S&P 500. The stock was up more than 10% in the morning after it topped analyst sales estimates. RHT is the world's largest provider of Linux software. Out of the S&P 500's 10 industry sectors, technology was the only one that did not post a loss. The worst individual performers were Novell Inc. (NOVL) (-6.61%), Wynn Resorts (WYNN) (-4.53%), Metlife Inc. (MET) (-3.88%), and Principal Financial Group (PFG) (-3.69%). NOVL came under pressure after reports surfaced that the company was having difficulty selling its NetWare and identity management products. The financial sector, however, was the weakest of the S&P 500's 10 industry sectors. It ended lower by 2%, while the industrials fell 1.5%.
The Nasdaq Composite ($COMPX) ended the session lower by 7.47 points, or 0.32%, on Thursday and it closed at 2,327.08. Hologic Inc. (HOLX) (+5.45%), Baidu.com (BIDU) (+3.51%), and Bed Bath & Beyond (BBBY) (+3.21%) were the top performers in the Nasdaq-100. Foster Wheeler (FWLT) (-2.65%) followed Wynn Resorts (WYNN) (-4.53%) in the losing category for the Nasdaq-100. Joy Global (JOYG) (-2.47%) and Stericycle (SRCL) (-2.25%) were also notable areas of weakness as both retreated from yesterday's 52-week highs.
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.