Financials Keep the Indices' Heads Above Water
Good day! The market managed to squeak by with small gains on Wednesday. The index futures established a third wave to the downside afterhours on Tuesday and into the early premarket action on Wednesday, but the pace of the selling was substantially more gradual than the moves that took place intraday. By 3:00 a.m. ET the buyers were already starting to return and the slowdown into the low helped them gain momentum when things turned around. By the time the opening bell rang, the indices had surpassed Tuesday's close.
Dow Jones Industrial Average
The bulls ran into some initial intraday trouble at around the same time as the 9:45 ET correction period. This was also when the 61.8% fibonacci retracement level was hitting from the previous day's selloff and the 15 minute 20 period moving average zone intraday in the indices. The combination was deadly and the market turned lower once again for a retest of previous lows on the 15 minute time frame.
The reaction to the support level was strong. It created a "V"-shaped bottom on the 5 and 15 minute charts. When this occurs, a trading range typically follows and it is difficult for the market to rally all the way back to the previous high and break it right away. Instead, the market typically has to work itself out over a longer period of time than the previous decline.
A change in momentum within the congestion will often help determine the direction of the breakout from the range, but it works the best if the change in momentum is near one end of the range or the other. On Wednesday, this change in momentum took place intraday, but also mid-range. A slower pullback created a bullish bias and the indices turned higher once again out of the 13:00 ET correction period, but this pivot was mid-range, so the indices still struggled when they retested the morning highs around 14:45 ET.
The momentum shift held, however, into afterhours trade and the index futures managed to work their way back to Tuesday's highs ahead of Thursday's opening bell. This creates that "V" pattern on the 15 minute time frame now as well, so we should see a longer congestion take place on that time frame now. The "V" bottom will make it difficult for the indices to penetrate and hold above Tuesday's highs without a slower pullback off the zone of those highs and then a push above them. Any slightly higher high before such an attempt is made will be beneficial to the bears since it will create a bull trap I call a 2TTM.
The Dow Jones Industrial Average ($DJI) had a gain of 13.32 points, or 0.12%, and closed at 11,372.48 on Wednesday. Nearly 2/3 of the Dow's 30 index components posted a gain. The financials led the gainers thanks to a steeper yield curve in bonds that is allowing them to borrow at lower, short-term rates and lend at higher, longer-term ones. Bank of America (BAC) rose 3.72%, JP Morgan (JPM) rose 2.57%, and American Express (AXP) ended the session higher by 1.90%. The weakest performers were McDonalds (MCD) (-1.99%), Boeing (BA) (-1.59%), and United Tech. (UTX) (-1.08%).
The S&P 500 ($SPX) rose 4.53 points, or 0.37%, and closed at 1,228.28. The best performers in the index were also dominated by the financials. The top gainers in the index were Lincoln Natl. (LNC) (+7.50%), First Third Bancorp (FITB) (+6.50%), Masco Corp. (MAS) (+5.82%), and Zion Bancorporation (ZION) (+5.50%). H&R Block (HRB) (-6.13%), Titanium Metals (TIE) (-4.15%), and American International Group (AIG) (-3.94%) were the biggest losers.
The Nasdaq Composite ($COMPX) ended the session higher by 10.67 points, or 0.41%, on Wednesday and it closed at 2,609.16. The top performers in the Nasdaq-100 were Foster Wheeler (FWLT), Apollo Group (APOL) (+2.92%), and Netapp Inc. (NTAP) (+2.80%). The weakest of these top 100 stocks in the Nasdaq were Cephalon Inc. (CEPH) (-3.09%), Vertex Pharmaceuticals (VRTX) (-1.99%), and Schein Henry (HSIC) (-1.73%).
Over the weekend I spent a few more minutes looking at the current action in gold. A strong daily reversal pattern was forming that I call a Momentum Reversal. This triggered early in the session on Tuesday and has continued to perform well. Gold fell $26.50 per ounce to $1,382.50 on Wednesday.
SPDR Gold Trust (GLD)
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.