Good day! Wednesday was an interesting day for the market. Despite indicating a corrective bias heading into the opening bell with the formation of an AvalancheTM on the 15 minute charts in the premarket, only the Nasdaq-100 followed through on this bias. As you can see in the middle NQ chart below, the name that I gave to this particular strategy was very fitting. Once the 15 minute, 20 period moving average broke lower, the selling quickly returned the index to Tuesday evening's congestion zone with a nearly complete closure of its Wednesday opening gap.
The Dow Jones Ind. Ave., on the other hand, was forming the same strategy heading into the open as well, but instead of pulling quickly through the moving average, it had a slower downside pace from 8:40 a.m. ET into 9:45 a.m. ET, which increased risk for the setup. Ideally, the index will pull off the upper end of the trading range that is hugging the 15 minute, 20 sma, form a smaller base along the lower end of that channel, and then break lower. Alternately, it will form 2-3 clear upside channels within the larger sideways channel that are slower-than-average, allowing a trader to take a setup on the break lower out of the second or third slower pull higher.
Dow Jones Industrial Average (Figure 1)
The Dow Jones Ind. Average has the cleanest price action throughout Wednesday's session, while the Nasdaq was the most difficult. The five minute chart of the YM shows a number of nearly textbook setups throughout the session, but the Nasdaq's return from morning lows was choppy and followed by congestion along the session's highs from the 11:15 ET correction period into the closing bell, leaving little opportunity for daytraders. A number of individual stocks within the index, however, experienced nice intraday swings that offered those who go beyond the index futures ample opportunities for the session for bulls and bears alike.
Although there were exceptions - most notably in the Nasdaq - most of the strength for the session took place by that 11:15 ET correction period. By the early afternoon the indices were starting to struggle. The Dow had the strongest reversal pattern with a Momentum ReversalTM on the 5 minute time frame that triggered at 12:30 ET. It was followed by solid breakdown action that left the index selling off into 15:30 ET. This final reversal period, however, gave the market a break and the indices popped slightly into the closing bell.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) had a gain of 83.56 points, or 0.72%, and closed at 11,755.44 on Wednesday. The top percentage performers in the Dow were the financials. JP Morgan Chase (JPM) rose 2.55%, while Bank of America (BAC) ended the session higher by 2.04%. They were followed by Boeing (BA) (+1.73%) and Microsoft (MSFT) (+1.57%). Over a third of the Dow's thirty index components posted gains over 1%. Only six posted a loss. The weakest were Disney (DIS) (-0.58%), Alcoa (AA) (-0.55%), and Caterpillar Inc. (CAT) (-0.49%).
Nasdaq Composite (Figure 3)
The S&P 500 ($SPX) rose 11.48 points or 0.9%, and closed at 1,285.96. ITT Corp. (ITT) was the strongest performer in the S&P 500 on Wednesday. It rose 16.52%. NVIDIA (NVDA) continued its stellar gains as well, rising another 14.97%. Micron Technology (MU) was the third-strongest gainer, up 7.11% after breaking out of a week-long trading range that also continued a larger monthly breakout. The losers were not as extreme as the day's gainers. The weakest percentage performers were Washington Post (WPO) (-2.55%) and AK Steel (AKS) (-2.43%). Hasbro (HAS) (-2.07%) was another top decliner.
The Nasdaq Composite ($COMPX) ended the session higher by 20.50 points, or 0.75%, on Wednesday and it closed at 2,737.33. NVIDIA (NVDA) and Micron Tech. (MU) topped the Nasdaq-100 gainer's list. Dollar Tree (DLTR), Ctrip.com (CTRP), Fastenal (FAST) (-1.04%) and Intuit (INTU) (-1%) were amongst the weakest.
The action heading into Thursday morning is mixed. On the smaller 5 minute charts the pace of the price action is bullish, but the 60 minute charts can easily develop into a multi-day correction off Wednesday's highs. This leaves me cautious and without a strong direction bias for the day. A change merely in the momentum on the 5 minute time frame is all it will take to trigger either another wave of buying on the larger intraday time frames, or several days of pullback. When this happens, it can often be better to focus on the smaller setups or stick to individual stocks that are strongly outperforming or underperforming the overall market.
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.