Good day! The market made a clean break of its upper trading channel on Wednesday right out of the gate. The session began with a gap higher in each of the three major indices. The index futures, however, had been extended in premarket trade and this had a strong affect on how the intraday action played out. The futures were still on the extended side into the opening bell, so instead of being able to trend strongly to the upside, the pace of the buying slowed and there was a great deal of overlap in price from one bar to the next on the intraday charts. Although this seemed like good news to the bulls, and in many cases it was, it was also positive action for the bears who were following it.
Dow Jones Industrial Average (Figure 1)
I've said it many times in recent weeks, but this is a day trader's market. The intraday swings back and forth are harsh for swing traders and position traders, although there are always exceptions like the daily breakouts on CWEI and so far on CTRP. Overall, however, those that are holding longer are having to deal with strong swings back and forth in the intraday action, which greatly increases the risk of getting flushed out, as well as misjudging ideal exits for gains.
Some stocks, like JOBS on the upside and INTC on the downside, did have a strong trend intraday on Wednesday, but the majority were again subject to the whiplash that has plagued the markets since last month. The manner in which the intraday uptrend held throughout the morning in the indices was actually a bearish development. The indices formed a series of slightly higher highs, which is something we've also seen a lot lately, and this created traps for the bulls. A third high on the 15 minute time frame was created soon after 14:00 ET. When the channel broke following that third high, it triggered a short setup. This Momentum Reversal™ is seen the most clearly on the 15 minute charts. The short setup was strong enough to wipe out most of the session's gains before the closing bell in a fraction of the time it had taken to establish those gains in the first place.