Good day! The market rallied on Tuesday morning mimicking Monday's action. It took until the early-morning hours, however, for the market to rest long enough following Monday morning to launch a successful bid for new highs. This kicked off that additional momentum play I wrote about in "Tuesday's Outlook" in yesterday's column and the follow-through was right in line with expectations for that type of setup.
The rally took off in earnest following the 9:45 ET correction period and continued until approximately 11:30 ET. At that point the indexes had struck equal move resistance compared to the rally from the previous session. This is shown in blue in the figures below.
Dow Jones Industrial Average
Additional resistance also curtailed further advances at that time, as did the time of day. Typically, a strong rally that holds above the 5 minute 20 sma throughout the morning will correct mid-day with at least a trading range throughout the lunch period. This time the market corrected with a two-wave pullback into 14:00 ET, but the pace and volume still favored the bulls. The market struggled to regain strength in the afternoon, however, since the mid-day correction was relatively brief compared to the once which took place the previous afternoon and afterhours. Instead, the risk was high that it would merely trap aggressive bulls hoping for another similar run.
Afterhours the trap became even clearer. The indices pulled back into the mid-day trading range, hugged that support zone as momentum shifted within the channel on the 5 minute time frame, and then broke lower as the evening wore on. It's no surprise that the highs for the session dallied with the 20-day moving average I warned about the day before. The two-wave rally off lows on the 15 minute charts combined with the moving average to stop the rally dead in its tracks.
The Dow Jones Industrial Average ($DJI) ended the day with a gain of 109.63 points, or 0.91%, and closed at 12,190.01 on Tuesday. Twenty-six of the Dow's thirty index components posted a gain. The top performers were Alcoa (AA) (+3.99%), Caterpillar Inc. (CAT) (+3.27%), DuPont (DD) (+2.64%), and Cisco Systems (CSCO) (+2.44%). The only components posting losses over 0.3% were Procter & Gamble (PG) (-1.34%) and Boeing (BA) (-0.72%).
The S&P 500 ($SPX) gain of 17.16 points, or 1.34%, and closed at 1,295.52. The top percentage performers in the S&P 500 on Tuesday were Monster Worldwide (MWW) (+7%), Tellabs Inc. (TLAB) (+6.42%), Priceline.com (PCLN) (+6.28%), Whole Foods (WFM) (+6.17%), and Cognizant Technology Solutions (CTSH) (+6.11%). The weakest performers were Walgreen Co. (WAG) (-4.21%), Motorola Mobility Holdings (MMI) (-2.86%), Sears Holdings Corp. (SHLD) (-2.16%), and Corning Inc. (GLW) (-1.45%).
The Nasdaq Composite ($COMPX) ended the session higher with a gain of 57.60 points, or 2.19%, on Tuesday and it closed at 2,687.26. Research In Motion (RIMM) trimmed its losses with a gain of 10.27% to lead the Nasdaq-100 after sharp losses the previous week. Other top performers were Baidu (BIDU) (+7.97%), Priceline.com (PCLN) (+6.28%), and Whole Foods (WFM) (+6.17%). Only five of the 100 index components posted a loss. Only Sears Holdings Corp. (SHLD) (-2.16%) posted a loss over 0.5%.
As we head into Wednesday we don't have the clearer price action to help guide the day's events. Two-wave rallies off lows into daily resistance will often end right there and be followed by a larger correction. This is not always the case, however, and at other times you'll get a third push to the upside. This seems unlikely to happen on a strong scale on Wednesday, but a false attempt is still possible. This is the price level I theorized about yesterday as being a point where the market can once again turn lower to lead the indices into a stronger test of the 200-day moving average support and while it doesn't look like such a test will happen quickly, it still remains a risk.
With the FOMC announcement looming on the horizon this afternoon, expect the morning price action to favor the day traders and scalpers and for things to quiet down mid-day until following the news. No change is anticipated out of the Fed, and while the reactions to the announcements are substantially less pronounced than in past years, you'll still want to be extra cautious positioning yourself immediately following the Fed's release of its current interest rate policy.
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.