Stock indexes drop to daily support levels

Good day!

Tuesday was a difficult session for the bulls. It began in premarket trade. Following Monday's intraday exhaustion move into the closing bell, the index futures crept higher afterhours and into early-morning trade on Tuesday. Resistance hit shortly after 5:00 a.m. ET when the S&P 500 (ES) and Dow Jones Ind. Ave. (YM) futures retested their 200 period moving averages on the 15 minute time frame. This had served as resistance on Monday as well. The slow ascent gave way quickly to selling once the 20 sma broke in these contracts. The Nasdaq-100 (NQ) action was very comparable and the support gave way around 7:00 a.m. ET.

Dow Jones Industrial Average (Figure 1)

The premarket selloff also triggered the breakdown on the 60-minute Dow. We've been following the daily congestion in the indices since the 5th of May and the market has shown signs over the past week of wanting to pull the indices into at least the 50 day moving average in the Dow and 100 day moving average in the Nasdaq-100 before attempting any type of recovery.

The Nasdaq easily hit this support level heading into Tuesday's opening bell, while both the Dow and S&P 500 struck 50 day sma support early on as well. The S&P 500 and Dow can continue to inch towards their 100 day sma as the week continues, but the pace on the 30 minute charts will play a large role in their success. They will both need gradual recovery action off Tuesday's support in order to mount another push lower on that time frame, but I'm not seeing a strong enough bias heading into late Tuesday evening to take sides. The 15 minute charts lead me to believe that Wednesday will be a choppy session with the potential for a rapid intraday flush lower. That flush, however, would have a difficult time sustaining a continuation attempt on the same time frame and would more likely be just enough to wipe out bottom hunters from Tuesday.

Tuesday's economic data did little to help the bulls. According to the Commerce Department, April's housing starts fell unexpectedly by 10.6% to a seasonally adjusted annual rate of 523,000 units. The flood of home foreclosures has continued to make existing home sales more lucrative since buyers can often purchase them for well under their assessed value. My own neighbor has his home for sale here on the west coast of Florida, which was one of the worst-hit locations in this housing slump and even though his home is listed nearly 50% off the 2007 highs, would-be buyers are still only offering 70% of his asking price. We're moving to Illinois ourselves over the next several weeks and looking at being stuck holding onto our properties here for quite awhile! The real estate slump has boosted rental incomes in some locations, such as hotshots like Miami, but many home owners are finding it very difficult to even generate enough rent to cover mortgage payments in most areas.

In other economic news, the Federal Reserve reported that industrial production was flat in April, despite analysts' anticipating an increase in production.

Although the market continued to fall following this data, the indices did find support before noon and held lows by 11:45 a.m. ET. The remainder of the afternoon consisted of corrective action off the morning support, but the trend was choppy and even the corrections within the afternoon's uptrend consisted of steeper pullbacks, making it more difficult to have confidence that the trend would easily continue into the close, although it did manage to do so.

S&P 500 (Figure 2)

The Dow Jones Industrial Average ($DJI) ended the day with a loss of 68.79 points, or 0.55%, and closed at 12,479.58 on Tuesday. Sixteen of Dow's thirty index components posted a gain for the day. The top percentage performers were JP Morgan Chase (JPM) (+2.17%), American Express (AXP) (+1.38%), Home Depot (HD) (+1.14%), and IBM (IBM) (+0.97%). The weakest performer was Hewlett-Packard (HPQ) (-7.26%) after it reported an increase in sales, but warned that the earthquake in Japan and diminished PC sales will weaken the current quarter's outlook. Other top decliners included Caterpillar (CAT) (-3.78%), Alcoa (AA) (-2.78%), and 3M (MMM) (-1.68%).