Good day! After a strong start to the New Year on Monday, the markets came under pressure in Tuesday's session. The strength of the buying into Monday morning kept the bears from completely gaining the upper hand, but the morning reversals off highs in gold and oil accelerated as the day progressed and picked up momentum even further into Tuesday. Crude oil closed in New York at $89.38 a barrel, while gold ended the session at $1,378.80 an ounce. This kept the pressure on the bulls in the overall market as well. Premarket buying on Tuesday in the indices gave way to selling as soon as the opening bell rang.
Dow Jones Industrial Average
As anticipated Tuesday's session was a good one for day traders. The market had a lot of intraday activity with strong directional moves on the five-minute charts. The S&P 500 and Nasdaq-100 futures established three waves of downside to complete a solid downtrend throughout the morning, while the strong Dow had a clear-cut, two-wave continuation pattern on the downside that triggered into noon. By 13:00 ET all three of the major indices were hitting support. The Dow and the Nasdaq were testing their five-minute 200-period moving averages, while price support from previous highs also served to stall the selloff.
The Nasdaq offered the cleanest setup for an early afternoon reversal off the lows, followed by the S&Ps. Lows held at 12:45 ET and the channels broke higher shortly before the 13:00 ET correction period. The reason the Nasdaq setup was the cleanest was due to how it formed on the 5 minute time frame: The third leg of selling was slower than the first and second (9:30-10:00 a.m. and 10:45-11:15 a.m.) and there was greater overlap in price from one bar to the next throughout the move, which lasted from 11:45 a.m.-12:45 a.m.
This typically indicates that when the channel breaks to the upside, it will have at least the momentum as the previous selling. If the overall selloff on the third leg is slower-than-average, that rally will typically be stronger than the prior momentum. Although it was slower than the previous moves to the downside, however, it was not slower-than-average in this case, so the rally, while strong, was not stronger than the selloff. Instead, it merely confirmed the larger bias I had going into the session: in favor of a trading range on the 30-minute time frame.
The market spent the remainder of the session trending higher on the five-minute charts. The five-minute20 sma served as support into the closing bell. A second buy setup took place coming out of the 14:00 ET correction period when congestion from five-minute resistance levels broke higher. A third took place in the final 45 minutes of the session when the indexes struck five-minute 20-period sma support once again, but this time the upside was muted and the indexes struggled with prior five-minute highs.
The Dow Jones Industrial Average ($DJI) had a gain of 20.43 points, or 0.18%, and closed at 11,691.18 on Tuesday. Just over two-thirds of the Dow's thirty index components posted a gain for the session. The leaders included Alcoa (AA) (+4.56%), Disney (DIS) (+3.09%), Hewlett-Packard (HPQ) (+2.08%), and Verizon (VZ) (+2.00%). The top losers were McDonald's (MCD) (-2.99%), Coca-Cola (KO) (-2.07%), and Home Depot (HD) (-1.81%).
The S&P 500 ($SPX) fell 1.69 points or 0.13%, and closed at 1,270.20. The top percentage performers in the index were MetroPCS Communications (PCS) (+6.50%), Alcoa (AA) (+4.56%), Quanta Svcs. (PWR) (+4.19%), and Cliffs Natural Resources (CLF) (+4.13%). The weakest performers were SuperValu (SVU) (-6.35%), Vulcan Materials (VMC) (-5.22%), and Sears Holdings (SHLD) (-4.81%).
The Nasdaq Composite ($COMPX) ended the session lower by 10.27 points, or 0.38%, on Tuesday and it closed at 2,681.25. The top performers in the Nasdaq-100 were Ctrip.com (CTRP) (+6.85%), Wynn Resorts (WYNN) (+3.12%), Amgen (AMGN) (+2.16%), and Micron Tech. (MU) (+2.06%). The weakest were Sears (SHLD) (-4.81%), O'Reilly Automotive (ORLY) (-4.25%), Whole Foods (WFMI) (-3.37%), and Dollar Tree (DLTR) (-3.20%).
Following Tuesday's close, the selloff resumed. A series of breakdowns continued into the early-morning hours on Wednesday before the indices formed a 2B at approximately 6:45 a.m. ET. This is a pattern in which a double bottom contains a slightly lower second low that serves as a type of bear trap. It allows for a stronger reversal to form off lows. These lows came at price support from last Thursday and will help the indices recover some of their after hours losses before Wednesday's opening bell. It also continued to provide confirmation for the development of a larger trading range or congestion on the 30-minute time frame.
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.