Stock indexes shift focus back to Europe

TUESDAY'S MARKET WRAP-UP

Market Snapshot for October 25, 2011 (5:15 p.m. ET):
Closing Prices: DOW 11,706.62 (-207.00, -1.74%), S&P 500 1,229.05 (-25.14, -2.00%), NASDAQ 2,638.42 (-61.02, -2.26%), Nikkei 225 8,762.31 (-81.67, -0.92), DAX 6,046.75 (-8.52, -0.14%), FTSE 5,525.54 (-22.52, -0.41%)
OIL 92.44, GOLD 1,706.30, SILVER 33.21
EURO 1.3906, YEN 76.04, BRITISH POUND 1.6001, U.S. DOLLAR INDEX 76.45

Swift Reaction Follows Daily Resistance

The indices struck strong daily resistance ahead of Tuesday's session (200-day moving averages in the S&P 500 and Dow Jones Ind. Average), making it difficult for the indices to push higher yesterday. As we headed into the day's session, the index futures were also experiencing trend exhaustion. Both the S&P ($SPX) and Dow ($DJI) had three highs after a strong initial run into Friday's open. Next they established longer periods of gradual correction, followed by a fourth high. This was repeated with another slightly higher high in the Dow ahead of Tuesday's open. As discussed in yesterday's column, this type of trend combination will typically lead to a break in the uptrend channel, whereby the market is unable to further sustain higher highs and higher lows and a larger correction typically occurs.

Dow Jones Industrial Average (Figure 1)

On Tuesday the selling began early. The slightly higher highs in all three indices that took place into 7:00 a.m. ET triggered a bull trap I call a 2T ("2 tops") on the 15-minute time frame. Since the pace slowed into the second high on both the Dow and Nasdaq compared to earlier buying, it created an excellent shorting opportunity on the 15 minute time frame. The pace of the reversal off premarket highs increased into Tuesday's opening bell following news that EU finance ministers would not be meeting ahead of Wednesday's summit as anticipated. A two-wave continuation pattern in the form of a triangle continued the selloff into the closing bell.

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