Good day! The market spent several days digesting last week's post-Fed rally that took the three major indices to new highs on the year. The index futures attempted to break through the ceiling in the early-morning hours on Tuesday, but the S&P 500 and Dow Jones Industrial Average hit strong resistance. It was only the Nasdaq that managed the feat, and it did so only barely. The Nasdaq futures had a strong wave of buying ahead of Tuesday's opening bell, but it stalled after hitting equal move resistance when compared to the early-morning rally on the 4th. This is shown in blue on the 30 minute chart of the NQ. in Figure 3.
Dow Jones Industrial Average (Figure 1)
When the opening bell rang, the Nasdaq pulled back with the rest of the market. Although it made a second attempt coming out of 10:00 a.m. ET, this merely led to a slightly higher high, resulting in a type of bull trap I call a 2T. Meanwhile, both the S&P 500 and Dow Jones Industrial Average shifted momentum on the 2 minute time frame and created reversal patterns of their own that triggered sellloffs heading into 10:30 a.m. ET.
The 10:00 a.m. ET economic data had very little impact upon the morning's price action. According to the Commerce Department, wholesale trade inventories rose 1.5% in September (greater than expected), while wholesale sales rose 0.4% (less than expected). Additionally, the National Federation of Independent Business reported an increase in optimism among small U.S. businesses.
S&P 500 (Figure 2)
The reversal that triggered at approximately 10:30 a.m. was only the first in a series of selloffs that would dominate Tuesday's trade. The market hit support with the 10:45 ET correction period, but fell into a level of congestion with declining volume along the intraday lows before breaking even lower into noon. Another period of congestion followed. Once again, volume dropped off as well. This indicates a lack of optimism by those seeking reversals and a lack of concern by those already positioned for further selling. After two waves of upside mid-day within the congestion, the base broke lower around 13:15 ET. A final continuation pattern formed between 13:45 ET and 14:45 ET. This one also saw a drop in volume and two waves of corrective action before hitting resistance at the 15 minute 20 sma and breaking lower into the final hour of trade.
Tuesday's trend was a solid one with great follow through and very nice risk to reward ratios on each of the day's intraday setups, making it an ideal session for daytraders who have been dealing with several days of choppier action. It wasn't a great one for the bulls, however, and it appears likely that the market will correct further this week before it decides whether or not to push again for another new high this month. So far this bias looks favorable since the prior highs from 2007 remain a magnet for the Nasdaq, but it will be important to watch for shifting momentum on the 60 minute charts to provide a "heads-up" for larger pullbacks.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 60.09 points, or 0.53%, and closed at 11,346.75 on Tuesday. The top gainers in the Dow were Exxon Mobil Corp. (XOM) (+1.1%), Microsoft Corp. (MSFT) (+0.5%), and Coca-Cola (KO) (+0.3%). The top decliners were Bank of America (BAC) (-2.6%), Kraft Foods (KFT) (-1.6%), Merck & Company Inc. (MRK) (-1.6%), and Du Pont De Nemours and Co. (DD) (-1.6%).
The S&P 500 ($SPX) fell 9.85 points, or 0.81%, and closed at 1,213.40. The top percentage gainers in the index were Priceline.com Inc. (PCLN) (+8.3%), EQT Corp. (EQT) (+5.1%), Range Resources Corp. (RRC) (+4.6%), and Cabot Oil & Gas Corp. (COG) (+4.0%). The weakest sector in the S&P 500 was the financials after news that banks such as Citigroup (C), Bank of America (BAC), and JP Morgan (JPM) will have to pay more to the Federal Deposit Insurance Corp. The biggest individual loser was Dean Foods (DF). It fell 18.0% after earnings fell 51%. It was followed by losses of 5.4% in HCP Inc. (HCP), 5.4% in Host Hotels and Resorts (HST), and 5.2% in AK Steel Holding Corp. (AKS).
The Nasdaq Composite ($COMPX) ended the session lower by 17.07 points, or 0.66%, on Tuesday and it closed at 2,562.98. The top gainers in the Nasdaq-100 were Logitech Intl. (LOGI) (+12.20%), Priceline.com (PCLN) (+8.25%), Warner Chilcott (WCRX) (+3.67%), and Yahoo (YHOO) (+3.22%). Yahoo's gains came on the heels of buyout rumors and even the possibility of taking the company private, while Priceline.com reported earnings that beat expectations. The top losers were NII Holdings (NIHD) (-4.17%), Sandisk Corp. (SNDK) (-3.60%), Garmin Ltd. (GRMN) (-3.50%), and Lam Research Corp. (LRCX) (-2.87%).
Gold for December delivery traded as high as $1,424.30 an ounce on Tuesday at the Comex division of the New York Mercantile Exchange. It held above $1,400 throughout the session and settled at $1,410.10 an ounce. Spot gold, however, was lower due to strength in the U.S. dollar and prices fell sharply for December delivery after New York's settlement. Silver and shares in silver mining companies were also lower after the CME Group (CME) increased its margin requirements for silver trading. Meanwhile, oil hit a new two-year high, pushing over the $87 a barrel level. Rising gas prices have once again sparked concern by consumers and they are expected to continue to climb.
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.