The rally on Tuesday fared better than I had initially anticipated, but we did still see the slowdown in the pace of that buying. The largest portion of the rally took place in premarket trade and into the opening bell. The momentum shifted once the 9:45 ET correction period hit. Although the market continued to trend higher throughout the session, it did so with a series of steps higher on the 5 minute time frame with a great deal of overlap from bar to bar on the 15 minute one. This indicated pressure on the bulls to maintain the gains and we began to see what pressure manifest itself into the closing bell.
The index futures attempted another push higher once the European sessions began, but the extent of Tuesday's gains helped create a pattern I call a 2T, which is a form of double top whereby the second high only slightly breaks the first. This creates a bull trap. The result was a pullback in premarket trade that will continue to hinder the bulls as Wednesday kicks off. Currently (8:45 a.m. ET) the market is sitting at support from Tuesday morning and is favoring range-bound action into Wednesday on the 15 minute time frame.
Nasdaq Composite (Figure 3)
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.