Equity indexes fail to hold gains

Market Giveth and Market Taketh Away


Good day! Monday was a give and take day for the markets. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all firmly tested their 20-day moving averages in Friday's session on strong selling. This has been a key buying point for the bulls over the past several months, but they have been getting nervous over the last week. Earnings season is slowing down and there isn't a lot of good news to latch onto. The index futures struggled on Sunday and early Monday morning to pull higher and continue to recover off Friday's lows, but the slow pace of the recovery made it easy for the bears to drive prices lower any chance they got. As shown on the 15 minute chart of the Nasdaq-100 E-minis (NQ, Figure 3), gradual trend moves on the upside that lasted for hours easily gave up their gains in less time.

Dow Jones Industrial Average

The most pronounced selloff in the futures market on Friday morning took place soon after the opening bell. Index prices were rounding off at highs in premarket trade, creating Momentum Reversals on the 15 minute time frame. Resistance hit within 15 minutes of the opening bell and the sellers jumped swiftly on board, driving prices lower to close the opening gap in less than 30 minutes. This wiped out gains in the Nasdaq that took six hours to obtain in the first place. Amazon.com (AMZN) was a key player in the Nasdaq's selloff. Wal-Mart (WMT) disappointed Amazon shareholders, but pleased consumers when it announced that it will offer free shipping on thousands of its online products for the holiday season, putting pressure on Amazon to compete.

Even though the market recovered from the early selloff, the recovery could not match the pace of the decline. In order to mount a strong recovery following a stronger-than-average drop, the pace of the selling typically has to slow before allowing real buying to come in. This would be similar to the slowing upside momentum in the Nasdaq between 5:00 a.m. ET and 9:30 a.m. ET that allowed strong selling to take over despite a rapid rally at 4:00 a.m.

Since it was the weakest performer, the Nasdaq had the most difficult time pushing higher into mid-day. The S&P 500 and Dow Jones Ind. Average continued the trend from Friday afternoon, but the overall pace remained slower than Friday morning's descent. By 14:00 ET the pace of the buying was also slowing and the correction period helped kick off another wave of strong downside that trended smoothly lower into the closing bell. All three of the major indices ended the session under their morning lows and that weakness continued to plague afterhours' trade as well, albeit at a slower rate of change.

Although the pace of the selling has slowed in the early-morning hours heading into Tuesday's session, all three of the major indices are now trading under their 20-day morning averages, hence putting pressure on the bulls. Typically, the rounded lows we are seeing in premarket trade will lead to an upside correction. The break in key technical support, however, will cause a lot of added concern and keep the bulls on edge.