Good day! The market has been in recovery mode since the second half of last week, but we were seeing things start to cool off heading into Tuesday morning. After a sharp rally into Monday morning that left the market extended and at daily resistance, the U.S. indices slowly began to retrace off highs. The index futures found support shortly after midnight and turned higher into the early morning hours.
The market has been highly tuned into global events over the past several weeks and one of the centers of attention has been Japan. Japan's Nikkei rose sharply in Tuesday's session on signs that workers were making progress on getting the disaster at the Fukushima nuclear power plant under control and Japanese automakers announced that they would soon be resuming production as well. The Japanese markets had been closed on Monday for a national holiday.
Dow Jones Industrial Average (Figure 1)
Although the U.S. index futures were higher in premarket trade, the rally slowed shortly after 5:00 a.m. ET. The stronger S&P 500 hit slightly higher highs as compared to Monday morning, which created a 2T reversal pattern. As I discussed in yesterday's column, since the pace of the rally was still stronger-than-average into the second high on the 15 minute time frame, the market didn't react sharply to begin with. Instead, it favored a more drawn-out correction over time.
This slower correction kept the price action in Tuesday's session on the choppy side once again, but the indices still had a few decent waves of price action on the 5 minute time frame for daytraders. The first continuation pattern for the premarket reversal lower took place heading into Tuesday's opening bell. The index futures had struck support at 7:00 a.m. ET and the S&P 500 and Dow Jones Ind. Average fell into a two-wave correction on the 5 minute charts ahead of the bell. The second low in the congestion hit at about 8:20 and the second bounce off that low was slower and more drawn out than the first. This left the indices favoring a breakdown.
In the meantime, the Nasdaq futures were hitting slightly higher highs after bouncing more strongly off the 7:00 a.m. ET support and formed a 2T of their own into the open on the 5 minute charts. Both sell patterns triggered into the open. Admittedly, however, the range for the action was narrow and it was more of a scalpers market.
S&P 500 (Figure 2)
The market's weakness continued as the morning wore on. Another two-wave correction on the 5 minute charts formed between 10:00 and 10:30 a.m. ET, which led to new intraday lows into 11:00. Volume was light throughout the session but dropped off even further mid-day. The slower pace on the upside at that time helped the indices pulled lower into the early afternoon, but light volume and slow momentum persisted into the closing bell. This works in favor of the larger daily bias for more upside this month, but kept the short-term focus favoring the bears. The index futures broke lower once again afterhours.