Good day! The index futures continued to tease last month's highs on Tuesday after the announcement that Bush-era tax cuts would be extended for another two years. Additionally, unemployment benefits will be extended for thirteen months and the payroll tax will be lowered by 2% for a year.
The price action remained range bound following Monday's close, but broke higher out of the 3:00 a.m. ET correction period as activity picked up overseas. The momentum soared over the course of the next two hours, but the pace began to fade following 5:00 a.m. ET.
An attempt to extend the rally ahead of the open was met with cautious buying and the indices crept to slightly higher highs on the 5 minute time frame. This created a reversal pattern in the Dow Jones Ind. Average and S&P 500 that I refer to as a 2TTM. It's a type of double top in which the second high takes place on slower momentum and serves to trap bulls that attempt to buy new highs. At the same time, it flushes out the bears that came on board following the first high. The result is typically a rapid reversal to the downside.
Dow Jones Industrial Average (Figure 1)
The selling of the premarket reversal pattern kicked in immediately out of the opening bell. Larger-than-average gaps in the indices do have a strong tendency to close when they take place after several days within an up or downtrend, so this technical bias helped as well. Heading into this week, I was already on the lookout for this type of price action. In fact, it's the action I wrote about over a week ago that I wanted to see before the market offered any type of larger daily correction. The pace of the buying, however, was stronger than I had wanted to see in order to form a rapid daily reversal.
The price action heading into the day was favorable for stronger pullback action on the shorter term time frames intraday. A continuation of the momentum shift took place mid-day. Slower downside into noon was followed by a very gradual uptrend as the indices hugged their 15 minute 20 period moving averages from 12:15 ET into 14:45 ET.
By hugging the moving average with a decline in volume, the indices were pointing towards a breakdown bias. This particular type of AvalancheTM is one I call a "Shallow Avalanche"TM because the initial pullback into the 20 sma is still not extreme. This type of setup will often lead to a breakdown that is stronger than the initial drop off highs. This bias held and the indices dropped sharply once the moving average gave way around 14:45 ET. The selloff continued into afterhours trade and the index futures eventually found support at Monday evening's lows in the Dow and S&P and Monday's closing price level in the Nasdaq.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) had a loss of 3.03 points, or 0.03%, and closed at 11,359.16 on Tuesday. Despite the loss, just over half of the Dow's thirty index components posted a gain for the day. The top performers were General Electric (GE) (+1.98%), Chevron Corp. (CVX) (+1.59%), Caterpillar Inc. (CAT) (+1.29%), and Kraft Foods (KFT) (+1.16%). The weakest performers were 3M (MMM) (-3.10%), JP Morgan Chase (JPM) (-1.65%), and Hewlett Packard (HPQ) (-1.54%).
The S&P 500 ($SPX) rose 0.63 points, or 0.05%, and closed at 1,223.75. The best performers in the index included Nicor Inc. (GAS) (+4.34%), Jabil Circuit (JBL) (+4.28%), H&R Block (HRB) (+4.07%), and New York Times (NYT) (+4.05%). The weakest were Cameron Intl. Corp. (CAM) (-4.27%), Baker Hughes (BHI) (-4.02%), and Intuitive Surgical Inc. (ISRG) (-3.53%).
The Nasdaq Composite ($COMPX) ended the session higher by 3.57 points, or 0.14%, on Tuesday and it closed at 2,599.49. The top performers in the Nasdaq-100 included Yahoo (YHOO) (+3.74%), Nvidia (NVDA) (+3.24%), and JB Hunt Trans. Svcs. (JBHT) (+3.12%). The weakest were Intuitive Surgical (ISRG) (-3.53%), Garmin Ltd. (GRMN) (-3.00%), and DirecTV (DTV) (+2.31%).
Nasdaq Composite (Figure 3)
In addition to the action in the indices, gold also had a difficult session. In yesterday's column I wrote about a Momentum Reversal pattern that was forming on the daily and weekly time frames. This reversal pattern (a short) triggered early in Tuesday's session and gold solf off steadily throughout the session. This has larger daily implications and gold favors a correction into the end of the year. Gold futures for February delivery fell $7.10 an ounce and settled at $1,409 an ounce. The intraday high in the morning was $1,432.50.
SPDR Gold Trust (GLD) (Figure 4)
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.
