Good day! For only the second time since last August, the market is finally showing corrective action on the daily time frame that is spilling over onto the weekly charts. Tuesday's session was particularly difficult for the major indices. Even though the index futures were higher in the early-morning hours, a larger correction was already well under development in the form of a Momentum ReversalTM on the 30 minute charts.
The Momentum ReversalTM pattern was the strongest in the Nasdaq futures (NQ). strong move higher on the 24th and 25th was followed by a series of three evenly spaced highs (Figure 3), whereby each high was slightly higher than the last. This shifted the momentum of the uptrend, making is susceptible to a larger breakdown. A variation of this reversal strategy is also evident in the S&P 500 futures (ES) in Figure 2.
Dow Jones Industrial Average (Figure 1)
The first trigger for the Momentum ReversalTM took place around 4:00 a.m. ET, but the confirmation came at Tuesday's opening bell. The index futures had already started to sell off by that point and were congesting at initial support levels from the lower end of the premarket uptrend channel. Within this correction were two counter-moves on the 5 minute time frame. This action is ideal for a continuation pattern. The larger Momentum ReversalTM confirmed as soon as this 5 minute correction off support between 7:30 a.m. and 9:30 a.m. ET broke lower.
This on Tuesday is in line with my expectations for a longer daily correction off last month's highs, but instead of a trading range, it open the door for further price correction as well. The 50 day moving average is the next major daily support for the Dow, which had been leading the rally in recent weeks.
S&P 500 (Figure 2)
Once the selling hit on Tuesday, the market never looked back. The indices began the session at the intraday highs and ended it at the intraday lows. The day's economic data didn't leave much of an impact. The Institute for Supply Management's manufacturing index rose for the 19th month straight and hit 61.4%. This is its highest level since May 2004. A reading over 50% indicates expansion. February's auto sales, posted in the afternoon, were also strong.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 168.32 points, or 1.38%, and closed at 12,058.02 on Tuesday. Out of the Dow's thirty index components, only Coca-Cola (KO) (+1.55%) and WalMart (WMT) (+0.17%) posted gains. The largest percentage losers were Alcoa (AA) (-3.68%), General Electric (GE) (-3.20%), DuPont (DD) (-3.01%), and Caterpillar (CAT) (-2.98%).
The S&P 500 ($SPX) fell 20.89 points, or 1.57%, and closed at 1,306.33. Boston Scientific (BSX) (+5.03), AES Corp. (AES) (+2.91%), Biogen Idec Inc. (BIIB) (+2.60%), Wynn Resorts (WYNN) (+2.36%), and Marathon Oil (MRO) (+2.32%) were the top percentage gainers in the S&P 500. Only 32 stocks in the index ended the session in the black. All of the S&P's ten industry sectors felt the pressure. Materials, industrials, and financials were the hardest. The biggest losers were Range Res. Corp. (RRC) (-7.29%), Titanium Metals Corp. (TIE) (-6.16%), Carnival Corp. (CCL) (-6.07%), and Chesapeake Energy (CHK) (-5.36%).
The Nasdaq Composite ($COMPX) ended the session lower by 44.86 points, or 1.61%, on Tuesday and it closed at 2,737.41. Only six of the Nasdaq-100's index components posted gains. The top three were Biogen Idec Inc. (BIIB) (+2.60%), Wynn Resorts (WYNN) (+2.36%), Amgen (AMGN) (+1.13%). The worst performers were NVIDIA (NVDA) (-4.46%), F5 Networks (FFIV) (-3.92%), Illumina (ILMN) (-3.86%), and Oracle Corp. (ORCL) (-3.77%).
Continued unrest in the Arab world, along with mixed messages from Fed Chairman Bernanke added to the day's weakness, but also kept things active in commodities. Gold hit new highs and closed at a record $1,431.20 an ounce. Oil prices also bounced back to retest $100 a barrel, which helped push gas prices higher once again.
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.