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.
S&P 500 (Figure 2)
The same type of action that took place heading into Wednesday in the indices also took place once again in the early morning hours on Thursday. The index futures recovered Wednesday's afternoon losses and pushed higher to retest the week's highs. The Nasdaq futures in particular created another Momentum Reversal™ almost identical to the intraday one going into the 4:00 a.m. ET correction period. The Momentum Reversal™ was even stronger than the one from Wednesday because the pace of the shift in momentum was more substantial.
The futures are now in a trading range with only a couple of hours before the opening bell rings. They fell sharply off the 4:00 a.m. highs into support at 6:30 a.m. How this second correction plays out will be crucial for the price action over the next several days. If it holds as a two-wave pullback, the market could still break higher this week, but if it continues a slower correction off the 6:30 a.m. ET lows, then it favors a third, and stronger selloff. Right now, however, the action is in favor of holding the support and correcting off that level going into the opening bell.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a gain of 75.68 points, or 0.69%, and closed at 11,096.08 on Thursday. Twenty-three of the Dow's 30 index components posted a gain. The leaders were Cisco Systems (CSCO) (+2.48%), Hewlett-Packard (HPQ) (+2.08%), Microsoft (MSFT) (+2.05%), and American Express (AXP) (+1.87%). Intel (INTC) (-2.68%), Bank of America (BAC) (-1.70%), JP Morgan (JPM) (-1.39%), and Home Depot (HD) (-1.31%) were the top losers.
The S&P 500 ($SPX) rose 8.33 points, or 0.71%, and closed at 1,178.10. The best performer in the S&P 500 was Williams Companies (WMB) (+9.79%). Yahoo (YHOO) followed with a gain of 5.68%. Other top gainers were Monsanto Co. (MON) (+4.67%), CSX Corp. (CSX) (+4.19%), and Tellabs (TLAB) (+4.18%). Marshall & Ilsley (MI) (-4.21%), Intuitive Surgical (ISRG) (-3.81%), and Analog Devices (ADI) (-3.50%) were the biggest losers.
The Nasdaq Composite ($COMPX) ended the session higher by 23.31 points, or 0.96%, on Thursday and it closed at 2,441.23. The top gainers in the Nasdaq-100 were Qiagen (QGEN) (+5.81%), Yahoo (YHOO) (+5.68%), Infosys Technologies (INFY) (+3.28%), and Nvidia (NVDA) (+3.00%). Intuitive Surgical (ISRG) (-3.81%), Intel Corp. (INTC) (-2.68%), Linear Technology (LLTC) (-2.41%), and Microchip Technology (MCHP) (-2.18%).
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.