Good day! The rally over the past two weeks in the indices has left them over-extended on the daily time frame and seeking corrective action. That shorter-term bias began to play out in Monday's session after gradual gains throughout most of the session gave way to selling in the final hour. Nevertheless, the sharp retreat found support as the price congestion that took place over the weekend and into early Monday morning. This support can be seen on the 15 minute charts of the Dow Jones Ind. Ave. and S&P 500 futures in Figures 1 and 2. At this zone of support, the pace of the selling shifted. A series of slightly lower lows formed to create a pattern I call a Momentum ReversalTM that triggered a buy setup heading into midnight Eastern.
Dow Jones Industrial Average (Figure 1)
The early-morning rally in the index futures was slower than the previous afternoon's descent, and faced pressure from abroad, but it began to recover heading into the day's economic data in the U.S. At 8:30 a.m. the latest in retail sales data was released and Wall Street and Main Street alike were crossing their fingers that the preliminary reports on holiday shopping activity from November would be able to surpass already high expectations. They managed to do just that, rising 0.8% and 1.2% excluding autos. At the same time the Producer Price Index for November also hit the wires. Analysts anticipated rising food and fuel prices to result in a 0.7% overall increase in the PPI. It rose 0.8% with the core PPI up 0.3%. This was slightly better than anticipated.
The rally gained momentum following the opening bell. The 5 minute 20 period moving average served as initial resistance, but all three of the major indices pushed through this barrier out of 10:00 a.m. ET. At that time, the Commerce Department reported that business inventories grew 0.7% in October, which was greater than the 1.1% increase analysts were anticipating. The strongest intraday gains took place prior to 10:30 a.m. ET. This was when the Nasdaq retested Monday's afternoon highs, which served as a strong resistance level. Price action began to drop off after that point as more and more market participants began to move to the sidelines in anticipation of the day's FOMC announcement.
S&P 500 (Figure 2)
The bulls held onto the reins throughout mid-day, but slightly higher highs in the Dow and S&P merely created the same type of Momentum ReversalTM seen in the opposite direction heading into midnight on Monday, as well as the one that took place on the 15 minute charts intraday heading into Monday afternoon off highs. This created a bearish bias before the afternoon news even hit the wires.