Good day! On Friday the market made headlines as the S&P 500 and Nasdaq had their largest one-day drops since last August and the Dow was hit by its largest one-day loss since mid-November. Strong price resistance at 1,300 in the S&P 500 and 12,000 in the Dow Jones Ind. Average played a role, as did the extent of the daily rally into those levels without larger corrections. It was headlines abroad, however, that garnered the greatest interest and affected everything from the indices to gold to oil to currency action.
On Monday some of the impact of Friday's news of escalating unrest in Egypt had begun to sink in. The selloff on Friday had slowed momentum in the second half of the session, leaving the S&P 500 and Dow Jones Ind. Ave. index futures with three distinct lows on the 5 and 15 minute charts within the second half of the day. This formed the core Momentum ReversalTM you've seen me discuss on a number of occasions in this column, but when a Momentum ReversalTM forms off a support level on the first pullback off new highs like it did on Friday, the upside potential can be limited. It's difficult for the market to establish the sharp reversals we see more often when this pattern forms after a more extended downtrend. As a result, I wasn't expecting much from it when the session began on Monday.
Dow Jones Industrial Average (Figure 1)
Further weakness in afterhours trade didn't help. But the pattern didn't trigger on the all-sessions charts due to further lows on Sunday evening. It was only when we take out the pre- and post-market trade that the pattern become evident in the S&P 500 and Dow Jones Ind. Ave. futures. The pattern confirmed when both of these pulled back in the upper end of the 5 minute channel out of Monday's opening bell. The buy setup triggered as that early-morning channel broke to the upside out of 10:15 a.m. ET.
The Nasdaq also formed a reversal pattern off lows, but instead of slightly lower lows on Friday afternoon, the index created a symmetrical triangle along lows. The subsequent breakdown led to one slightly lower low on Sunday evening that created a bear trap called a 2B. This triggered a reversal early on Sunday evening, but since the pace of the drop into that second low was similar to the drop into Friday's low, the correction got off to a slow start.
S&P 500 (Figure 2)