Good day! Monday was a quiet day for the markets. Earnings season is just starting to gear up with Intel's (INTC) earnings following the closing bell on Tuesday, and the market has reached levels of price extension that have the bulls questioning just how much further the current rally will go without a correction. Meanwhile, the bears are nervous as well after a number of false starts with sharp intraday selloffs earlier in the month.
Dow Jones Industrial Average (Figure 1)
The markets did tick higher once again on Monday as well, continuing the bias I expressed in the weekend column, but the bears remained and hovered on the sidelines until later in the day. A trading range at premarket highs set the tone for the opening action. The index futures had been pulling back gradually since around 5:00 a.m. ET in premarket trade. This pullback developed with two smaller waves of downside within the larger correction. The result was a 2-wave correction typical of continuation patterns. The opening bell helped provide the fuel for this buy setup's follow through.
The morning rally lasted until 10:30 a.m. ET and took the Nasdaq and S&P 500 to new monthly highs intraday. They were not able to clear resistance, however, and the S&P e-minis held Sunday evening's highs perfectly. The Dow also dealt with strong price resistance at this same time. The indices pulled back strongly, but briefly, off these highs before falling into a longer trading range that lasted into the last hour of trade.
S&P 500 (Figure 2)
As the afternoon wore on, the bulls' hold began to weaken. Volume dropped off even as the afternoon trend inched higher within the wider trading range. A series of three highs were formed on a 5 minute time frame between 11:00 a.m. ET and 14:00 ET. This extended that smaller trend and the extension took place just as the indices were testing the price zone from morning highs. An initial reversal triggered coming out of the 14:00 ET correction period. This was not enough to result in a strong selloff, but the Avalanche™ pattern that followed was. This triggered heading into the final hour of trade and the bearish momentum built on itself until just prior to the close when support hit at the 5 minute 200 period moving averages in the indices and previous pivot points on the 15 minute time frame.
Strong Momentum Reversals such as the one that took place on Monday afternoon have a difficult time reversing a second time to offer a strong recovery, particularly if there is larger time frame resistance overhead as well. The index futures fell into a trading range afterhours, which then gave way to a second wave of selling around 20:00 ET. A second period of congestion on the 5 minute charts led to a third drop heading into midnight. This late evening selloff was strong enough to take the index futures back into the trading range that was in place heading into Friday morning. The pace of the selling continues to show us that the bulls are on shaky ground, even if they are still holding it.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a gain of 3.86 points, or 0.04%, and closed at 11,010.34 on Monday. 2/3 of the Dow's 30 index components posted a gain, despite the slim advance. The leaders were Boeing (BA) (+1.10%), J.P. Morgan (JPM) (+1.07%), Verizon (VZ) (+0.61%), and IBM (+0.58%). DuPont (DD) (-1.22%), 3M (MMM) (-1.02%), General Electric (GE) (-0.93%), and McDonalds (MCD) (-0.67%) were the biggest losers.
The S&P 500 ($SPX) rose 0.17 point, or 0.01%, and closed at 1,165.32. Wynn Resorts (WYNN) (+8.45%), New York Times (NYT) (+7.11%), SuperValu (SVU) (+5.75%), and Office Depot (ODP) (+5.00%) were the top gainers in the S&P 500. The biggest losers were Citrix Systems (CTXS) (-6.65%), Salesforce.com (CRM) (-5.63%), Akamai Tech. (AKAM) (-3.81%), and Tenet Healthcare (THC) (-3.81%) were the biggest losers.
The Nasdaq Composite ($COMPX) ended the session higher by 0.42 points, or 0.02%, on Monday and it closed at 2,402.33. Warner Chilcott (WCRX) followed Wynn Resorts on the gainer's list for the Nasdaq-100. It was up 7.18% on news that the FDA approved its osteoporosis drug. Logitech (LOGI) (+3.81%) and Xilinx Inc. (XLNX) (+2.03%) round off the top four. Citrix Systems (CTXS) was the biggest loser in the Nasdaq-100 as well. It was followed by Priceline (PCLN) (-2.51%), Nii Holdings (NIHD) (-1.63%), and Amazon.com (AMZN) (-1.62%).
A great deal of press had been given lately to speculation that the Federal Reserve will soon begin another round of quantitative easing by purchasing Treasury securities to help boost the economy. With so many eyes on the Fed, Tuesday's 2:00 p.m. ET release of the Sept. 21 meeting minutes of the Federal Open Market Committee will be widely followed. The larger bias I expressed over the weekend remains in play. Overall I am favoring a longer period of congestion as the market corrects more over time than through price in the weeks ahead. In the short term, however, I'm watch for a period of smaller congestion in the early morning hours with further downside likely on the 30 minute all-sessions charts (which include afterhours and premarket data).
Note: Unless otherwise stated, the index action described below relates to the EMini 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.