Good day! Since Friday the market has been in a recovery mode, pulling steadily off last week's lows. The S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) have both held a gradual uptrend channel on the 60-minute charts throughout the week, while the stronger Nasdaq-100 ($NDX) rounded off at lows and gained upside momentum as the week progressed. The Dow was striking the upper end of its 60-minute channel when Tuesday's session wound to a close, leaving it overbought on a 15 minute time frame while the Nasdaq-100 was dealing with equal move price resistance on the 15 minute time frame. This left the indices extended in the short-term, but still within a larger daily trading range heading into early Wednesday morning.
Dow Jones Industrial Average (Figure 1)
The bulls received a hit prior to the open between 5-6:00 a.m. ET when both the Dow and S&P 500 attempted a premature breakout to new highs on the week. This created a double top on the 15 minute time frame that I call a 2T and is a form of a trap since slightly higher highs trap overzealous bulls only to flush them out once again. This type of 2T is common following the type of trend the Dow experienced on Tuesday which consisted of a series of three highs, each slightly higher than the last, after a larger initial rally.
The premarket reversal had a bit of help. The Bank of England signaled that it would likely raise its key lending rate prior to the end of the year in order to combat rising inflationary pressures. The European Central Bank raised its rates for the first time since the start of the current economic crisis about a month ago, and although it is not planning on another rate increase in June, it has not ruled out increasing the official borrowing costs later in the summer. This has sparked further debate in the U.S. regarding our own Fed's intentions. Despite rhetoric that inflation remains under control, food and energy costs have been rising sharply in recent quarters.