Good day! Stocks struggled to gain a foothold on Wednesday. Tuesday left off with a widening triangle on the 5 and 15 minute charts that began just before noon and continued into afterhours trade. This is a pattern that offers very little directional bias as an immediate result of the formation. Typically there are two waves of corrective action coming out of the upper end of the triangle on the downside, but how those waves form usually creates the larger time frame bias and a longer trading range is quite common. As a result, my larger daily bias remained unchanged heading into Wednesday, but I didn't favor one direction over the other for intraday activity.
Dow Jones Industrial Average (Figure 1)
The market seemed to agree. Wednesday's session was light and lacked a strong trend bias. The morning began with a weak open after the triangle narrowed and then began to widen in premarket trade. A smaller zone of congestion followed, leading to a secondary drop from 10:15 a.m. ET that took the indices back to the lower end of the triangle's channel. This support zone held, leading to a Phoenix out of the 11:00 a.m. ET correction period. The market climbed off that low into the early afternoon with action that was very similar to the late-day rally on Tuesday and the opening gap was able to close in the S&P 500 and Dow Jones Ind. Average.
The Nasdaq, which had led the bulls throughout most of September, began to lag on Wednesday. Although it closed the gap early and had better relative strength in the morning, the roles shifted into the afternoon. Like the S&P and Dow, the Nasdaq also made a recovery play into the early afternoon, but it fell short of earlier highs and did not have the smooth uptrend of the other two indices. It stalled at its 5 minute 200 sma intraday at 11:30 ET and an attempt to break through that level created a bull trap into 12:30 ET.
The trend reversed into the afternoon and the Nasdaq formed a textbook downtrend on the 2 minute time frame. It established three waves of selling into 13:40 ET with each wave of selling followed by a two-wave correction. The first correction was into 13:00 ET, while the second was into 13:30 ET. This left the index exhausted into 13:45 ET when the S&P 500 futures were also hitting support at their own 5 minute 200 sma. The trend exhaustion and support both meant that the market favored a bounce in the second half of the afternoon and the early afternoon downtrend easily broke at the same time as the 14:00 ET correction period hit. The selloff was so sharp that it took all three of the major indices back into the session's lows within 15 minutes.