Good day! On Tuesday the market managed to recover a large portion of the losses from a gap lower in the indices that left the Dow Jones Industrial Average down nearly 300 points at the opening bell. The market's increased pace to the downside was the result of several factors. The market was already favoring corrective move lower out of the congestion zone that had taken place along the 50 day moving average, but the pace was not expected to be a strong one.
The correction accelerated, however, following an 8.9 earthquake off the coast of Japan that sent the island nation into a tailspin as it was left to deal with the aftermath of the quake and subsequent tsunamis and aftershocks. The most perilous is the ongoing crisis at the Fukushima Daiichi nuclear power plant. Several explosions rocked the facility in the days following the quake and radiation levels have hindered workers trying to contain the damage at the site. It was this particular catastrophe that led Wednesday's market.
Dow Jones Industrial Average (Figure 1)
The index futures had closed near intraday highs on Tuesday, albeit still in negative territory for the day. Throughout that session, the climb off morning lows had been a choppy one with a lot of overlap in price from one bar to the next on the 5 and 15 minute time frames. As I mentioned in yesterday's column, this, combined with strong resistance levels intraday into the final 30 minutes of trade on Tuesday, allowed the index futures to fall quickly off the intraday highs in afterhours trade.
That weakness we saw underlying Tuesday's trade followed through into the early morning hours on Wednesday. Although the index futures retested the zone of Tuesday's highs afterhours, the momentum was beginning to shift. The index futures pulled back off the 15 minute 200 period moving average a second time at 21:00 ET into midnight. This was followed by a substantially more gradual pull higher into Wednesday morning. This slower trend contained three wave of buying into 4:00 a.m. ET, which exhausted the trend move, and it also held the 15 minute 200 sma once again. By 5:00 a.m. ET this larger triangle formation that can been seen on the 15 minute charts had triggered a short setup.
S&P 500 (Figure 2)
The pace of Wednesday's selloff increased after U.S. Energy Secretary Steven Chu stated that he believed a partial meltdown did occur in Japan and reported to the House Energy & Commerce subcommittee that the situation was more serious that the worst nuclear disaster in American history at Pennsylvania's Three Mile Island in 1979 that had involved a partial core meltdown. Infant mortality spiked in area in the immediate years following the partial meltdown in PA, and although the wildlife was also suspected of being highly affected, the official documentation was inconclusive.
Alternative energy companies, particularly solar, garnered a lot of attention over the past several days. Although energy companies were the strongest performers in the S&P 500 on Wednesday, solar took a back seat. Yesterday we looked at several companies and the main trait shown intraday was trend extension in the short run. As expected, the short-term highs were established by Wednesday morning. This sector remains of interest, however, so it's worth continuing to track in coming weeks.
Nasdaq Composite (Figure 3)
The indices sold off throughout Wednesday's session, but attempted to recover once equal move levels had been hit as compared to the descent off Monday's highs into the premarket lows on Tuesday. This is shown in blue on the 15 minute time frame. As on Tuesday, the lows were retested, which created a 2B afterhours on Wednesday evening. This is a reversal strategy and helped shift the pace of the selloff to allow for a better corrective move off lows.
Although the market is at strong daily support at 20 week moving averages, the 15 minute 200 sma on the all-sessions time frame will remain resistance into Thursday and there is a strong chance for once more test of the week's lows before the market can stabilize on the daily time frame for a larger correction to the selloff.
The Dow Jones Industrial Average ($DJI) had a loss of 242.12 points, or 2.04%, and closed at 11,613.30 on Wednesday. Every single one of the Dow's thirty index components posted a loss on the day. The weakest performers were IBM (IBM) (-3.79%), General Electric (GE) (-3.37%), American Express (AXP) (-2.93%), Boeing (BA) (-2.87%), Exxon Mobil (XOM) (-2.56%), and Disney (DIS) (-2.45%).
The S&P 500 ($SPX) fell 24.99 points, or 1.95%, and closed at 1,256.88. Only a few dozen of the S&P's 500 index components managed to end Wednesday's session in the black. The top percentage performers were in energy. The leaders were Peabody Energy (BTU) (+3.90%), Range Res. Corp. (RRC) (+3.81%), Southwestern Energy Corp. (SWN) (+3.28%), Chesapeake Energy (CHK) (+3.09%), and Consol Energy (CNX) (+1.71%). The weakest percentage performers were NASDAQ OMX Group (NDAQ) (-5.15%), Medco Health Solutions (MHS) (-4.90%), Qualcomm (QCOM) (-4.72%), and Apple Inc. (AAPL) (-4.46%).
The Nasdaq Composite ($COMPX) ended the session lower by 50.51 points, or 1.89%, on Wednesday and it closed at 2,616.82. Only eight of the stocks in the Nasdaq-100 managed to end the session in positive territory. The leaders were Altera Corp. (ALTR) (+1.66%), Xilinx Inc. (XLNX) (+1.59%), Warner Chilcott (WCRX) (+1.36%), Whole Foods Market (WFMI) (+1.18%). The weakest performers were Qualcomm Inc. (QCOM) (-4.72%), Apple Inc. (AAPL), Maxim Integrated Prods. (MXIM) (-4.40%), and Sandisk Corp. (SNDK) (-3.73%).
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.