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.
S&P 500 (Figure 2)
Despite the support and correction period, however, the reversal off the mid-day highs from 12:20 ET into 13:40 ET was not long enough compared to the late morning rally off lows to sustain another strong trend into the close. This was similar to the situation the market ran into in the early afternoon on Tuesday. The S&P 500 and Dow barely struck a new afternoon high before stalling, whereas the weaker Nasdaq held the price resistance at its mid-day highs. The indices then formed a smaller channel between 14:30 to 15:00 ET with the S&Ps and Dow hugging their 5 minute 20 period moving averages. This pattern is one I've named an Avalanche. The reason behind the terminology is obvious when looking at this example. Once the moving average gave way with the 15:00 ET correction period, prices plummeted.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a loss of 22.86 points, or 0.21%, and closed at 10,835.28 on Wednesday. 7 of the Dow's 30 index components posted a gain, but only two rose more than 1%. The top performers were Boeing (BA) (+2.25%), Hewlett-Packard (HPQ) (+2.19%), Chevron (CVX) (+0.49%), and IBM (+0.44%). 7 of the 30 posted losses greater than 1%. The weakest shares were DuPont (DD) (-2.50%), American Express (AXP) (-1.56%), JP Morgan (JPM) (-1.39%), and Intel Corp. (INTC) (-1.38%).
The S&P 500 ($SPX) fell 2.97 points, or 0.26%, and closed at 1,144.73. The top performers in the S&P 500 were Cabot Oil & Gas (COG) (+5.19%), Range Res. (RRC) (+4.90%), Advanced Micro Devices (AMD) (+4.75%), and EQT Corp. (EQT) (+4.62%).The weakest performers were Urban Outfitters (URBN) (-8.35%), News Corp. (NWSA) (-3.09%), Kimco Realty Corp. (KIM) (-2.72%) and Starwood Hotels & Resorts (HOT) (-2.69%). URBN's selloff was attributed to slow September sales. It ended the session at support.
The Nasdaq Composite ($COMPX) ended the session lower by 3.03 points, or 0.13%, on Wednesday and it closed at 2,376.56. The top gainers in the Nasdaq-100 were Sandisk (SNDK) (+4.61%), Research In Motion (RIMM) (+3.09%), Logitech (LOGI) (+2.74%), and Seagate Technology (STX) (+2.74%). The biggest losers in the Nasdaq-100 were Urban Outfitters (URBN) (-8.35%), News Corp. (NWSA) (-3.09%), Expedia (EXPE) (-2.07%), and Electronic Arts (ERTS) (-1.93%).
A key focus for the market on Wednesday was the strong speculation as to what the Federal Reserve has in mind to help further an economic recovery. The Federal Reserve Bank of Boston's President Eric Rosengren stated that the economy is growing too slowly to help reduce unemployment or to forestall deflationary pressures, while the Philadelphia Fed President Charles Plosser has indicated that he feels that further "financial easing" by the Fed is unnecessary. The financials were hurt by the speculation and were among the weakest performers for the day. This also affected the U.S. dollar, which weakened further, while gold once again made new highs as it neared $1,310 an ounce.
As we near the end of the month, it's becoming more and more difficult for the bulls to hang on and we're starting to see the rally becoming more strained. After each advance in the past several weeks the market has skidded lower. It's then had to claw its way back to the top of the daily channel. The drop into the closing bell on Wednesday was another example of just such a skid. The bears remain in control afterhours as well with the momentum in the afterhours congestion favoring a break lower. I had been expecting one more push higher to another slightly higher high on the daily time frame by the end of the week, but the market isn't quite ready for such an attempt and the price action at the time this column was written is not yet offering any strong incentive to take it there.
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.