Equity indexes kick off 2011 with a bang

Good day! The indexes shot past last year's highs on Monday to kick off 2011. The index futures rallied strongly off Friday's lows after testing the lower end of the trading channel that began on Wednesday. This was the third test of lows on the all-sessions charts and it resulted in an exhaustion to the gradual pullback. The entire channel broke higher after trading resumed on Sunday evening and since the overall pace of the correction was slower-than-average, the resulting reversal was quite rapid.

As seen in blue on the 15-minute chart of the Dow futures, the late-evening rally was the third push to the upside since bottoming on Friday morning. This once again created exhaustion. This time, however, the pace of the rally kept the mood bullish and the indexes congested at highs throughout most of the morning in premarket trade on Monday.

Dow Jones Industrial Average

The uptrend resumed shortly after 7:00 a.m. ET and hit initial resistance at new morning highs at 8:00 a.m. A gradual pullback followed as the opening bell approached. It was only a matter of minutes before the first setup triggered intraday. The indices stalled for several minutes at the open, creating a gap strategy that triggered when the five-minute highs broke. A smaller base was also present on the 1 minute and tick charts that could have been used as alternative entry triggers. Gap strategies such as this work particularly well when the market is breaking out on the daily charts as a result of the gap. Breakdowns work equally as well on the short side.

By the time the 10:00 a.m. ET economic data was released, the market was already extended on the 5 minute time frame. The result was a very modest reaction to the latest manufacturing and construction reports. According to the Institute for Supply Management, its national factory activity index rose for the 17th straight month in December. New orders rose, although employment hit a 9-month low. Meanwhile, construction spending was also on the rise. It hit a five-month high in November.

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