Equity indexes rally, stop short of key levels

Good day! The market has continued to inch higher to kick off the new week as earnings season heats up. Both the S&P 500 and Dow Jones Ind. Average have been teasing key price target levels over the past week, but have yet to solidly test them. In the S&P 500 that level is 1,300. In the Dow it's 1,200.

The S&P 500 index futures came the closest on the 18th at less than 4 points away in the early-morning hours, while the Dow futures got within 50 points early Tuesday morning. Unfortunately, the slower pace of upside, which began at noon on Monday, also created a Momentum ReversalTM for a short setup. This triggered right after the Dow futures tested the 1,250 level between 1:00-2:30 a.m. ET. This strategy forms when the market rallies sharply and then establishes a series of slightly higher highs, effectively shifting the momentum of the rally to a substantially slower pace than it was to begin with. Strong reversals off the highs typically follow. Overseas, the United Kingdom reported a disappointing fourth-quarter GDP.

Two sharp waves of selling coming out of the Momentum ReversalTM wiped out most of Monday's gains and leaves the index futures testing support in the hour heading into Tuesday's opening bell.

Earnings due out this morning include Johnson & Johnson (JNJ), which has already been displaying weakness on the weekly charts, 2M (MMM), Travelers (TRV), Verizon (VZ), and U.S. Steel (X). Yahoo (YHOO) reports earnings after the close.

This week is also a busy one on the data and news front. Among the morning's economic releases are the S&P Case Shiller Home Price Index and consumer confidence. The Home Price Index is expected to have fallen 1.5% in November, while consumer confidence is expected to have increased from a reading of 52.4 last month to 53.5. President Obama's State of the Union address is also this evening. He's expected to discuss the current labor market and overall economic health.

Dow Jones Industrial Average

In Monday's session the S&P 500 and Nasdaq both continued to trade within a larger daily trading range that began early last week. They've held their 20-day moving averages, reacting off those support levels with a shift in momentum on the 15-minute charts.

A two-wave correction took place off Friday's highs on the all-sessions charts. This is seen the most clearly on the ES chart below in blue. The first pullback began Friday morning into early Sunday evening. This was followed with a bounce to a second high early on Monday morning. The second low hit several hours later still in premarket trade to complete the second pullback. Notice that each wave within this pattern also had two smaller waves as well. This can help a great deal with timing positions. I showed the two-wave rally that led to the second high in the larger pattern in red.

The 15 minute strategy created a buy setup heading into Monday morning and the market had a solid trend higher throughout the first half of the trading day. Unfortunately for daytraders like me, if you missed the initial trigger, you may have had a more difficult time catching the move once it was underway. The rally never paused long enough to even test its 20 period moving average on the 5 minute charts and just kept chugging along until resistance hit over noon as the S&P 500 and Nasdaq retested Friday's highs. Meanwhile, the Dow broke cleanly to new highs on the year on strong volume. All three of the major indices ended the session near the day's highs.

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