Good day! Despite a strong showing to kick off the new week, the market struggled as Tuesday began. A number of factors influenced the morning's correction. To begin with, Monday's rally established a move on the 15 minute charts for the index futures that mirrored Friday's premarket and opening rally. This created upside exhaustion into Monday's close. A series of slightly higher highs then formed afterhours Monday and into the early morning on Tuesday. This created the Momentum ReversalTM pattern I wrote about in yesterday's column.
A Momentum ReversalTM is a strategy based upon the shifting momentum of a trend. In this case it was an uptrend on the 5 minute time frame. Although the trend remained an uptrend with higher highs and higher lows, the pace of the ascent dramatically slowed. When the lower end of the uptrend channel broke to the downside it triggered a short. It received some help overseas after the United Kingdom reported a disappointing gross domestic product for the fourth-quarter. The channel broke and the short confirmed around 3:00 a.m. ET.
Dow Jones Industrial Average (Figure 1)
By 5:00 a.m. ET the index futures were striking initial zones of support after two waves of downside reaction to the Momentum ReversalTM. There was a brief pop and a slower return to the zone of the 5-6:00 a.m. ET lows. This created another reversal formation called a 2B (think "two bottoms") that created the bullish bias discussed in yesterday's column heading into Tuesday's open. This pattern triggered shortly after 9:00 a.m. ET and followed through strongly for the next hour. This rally recouped the premarket losses, but the recovery was short-lived.
After hitting resistance at 10:00 a.m. ET, the market returned to opening price levels and then formed another short setup that triggered at 11:00 a.m. ET. By this point the indices were once again showing strong divergence. The Nasdaq-100 had substantially more strength than the Dow. While the Dow based at lows, creating an AvalancheTM on the 5 minute time frame, the Nasdaq managed a slightly higher high. This created a bull trap I call a 2TTM (short for "two tops").
The Dow and S&P 500 both broke to new intraday lows following the 11:00 a.m. ET sell signal, but 5 minute 200 sma support held in both the Dow and Nasdaq-100 around 11:30. From that point onward the 15 minute trend remained "wishy-washy". The downtrend remained barely intact in the S&P 500 and Dow, but the overall price action favored a trading range. The range was wide enough, however, that it was just the type of action daytraders and scalpers love. Support and resistance levels, as well as correction period, held extremely well and follow-through on triggered strategies was typically swift.
The last reversal took place out of 14:30 ET when the Nasdaq once again tested the intraday lows and the afternoon drop mirrored the earlier one in the morning. This reversal gained momentum out of the 15:00 ET correction period and remained strong into the close with only a slight pause at previous intraday highs.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) had a loss of 3.33 points, or 0.03%, and closed at 11,977.19 on Tuesday. Thanks to the late-day recovery, half of the Dow's thirty index components posted a gain. WalMart (WMT) (+2.16%), Cisco (CSCO) (+1.75%), Verizon (VZ) (+1.56%), and Intel (INTC) were the top performers. American Express (AXP) (-2.16%), Bank of America (BAC) (-2.08%), 3M (MMM) (-2.02%), and Johnson & Johnson (JNJ) (-1.83%) were the weakest performers.
The S&P 500 ($SPX) rose 0.34 point or 0.03%, and closed at 1,291.18. Harley Davidson (HOG) (+8.06%), Corning Inc. (GLW) (+7.99%), AK Steel Holding (AKS) (+7.68%), and Sara Lee Corp. (SLE) (+6.97%) were the top percentage gainers in the S&P 500. Tellabs Inc. (TLAB) (-19.18%), Red Hat Inc. (RHT) (-4.94%), Teradata Corp. (TDC) (-4.76%), and Grainger W W (GWW) (-4.74%) were the worst percentage performers in the index.
The Nasdaq Composite ($COMPX) ended the session higher by 1.70 points, or 0.06%, on Tuesday and it closed at 2,719.25. The strongest stocks in the Nasdaq-100 were Teva Pharmaceuticals (TEVA) (+3.61%), Sears Holding (SHLD) (+3.22%), Cisco (CSCO) (+1.75%), and Ctrip.com (CTRP) (+1.64%). The weakest stocks in the Nasdaq-100 were Citrix Systems (CTXS) (-4.25%), Sandisk (SNDK) (-4.20%), First Solar (FSLR) (-3.70%), and Netapp (NTAP) (-3.33%).
Nasdaq Composite (Figure 3)
Tuesday's earnings reports were mixed along with the market. Johnson & Johnson (JNJ), 3M (MMM) disappointed shareholders, while Travelers (TRV) and Verizon (VZ) helped lift their spirits.
The economic data on Tuesday was also mixed. Home prices in 20 major metro areas tracked by the S&P Care Shiller Home Price Index experienced a sharp drop of 1% compared to October. This amounts to a 1.6% year-over-year decline compared to the 1.5% analysts anticipated. Foreclosures continued to hit record highs with over a million people losing their homes and 2.9 million notice filed.
Despite the dismal housing data, consumer confidence hit highs last seen in May 2010. Economist were anticipating a move higher from 52.4 to 53.5 this month. Instead, it jumped to 60.6.
On Wednesday expect more housing data, the latest FOMC announcement and earnings from Boeing (BA), United Technologies (UTX) and Xerox (XRX) ahead of the open. Netflix (NFLX) reports after the close. Netflix is forming a potential bull flag on the weekly time frame.
The market continues to favor holding above 20 day moving averages on Wednesday, but the S&P 500 is continuing to show strong relative weakness compared to the other two major indices.
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.