Focus Letter

Bears Take Charge

Good morning! The bearish bias we were beginning to see into last week saw some initial resolve on Monday. The Dow Jones Ind. Ave. ($INDU) fell 63 points to 10,958.59, back under the 11k level. The S&P500 ($SPX) closed 8.97 points lower at 1,278.26, and the Nasdaq Composite $COMPX) fell 16.57 points to 2,286.03. Volume was pretty normal as a whole, but this was due primarily to the morning action.

Following the sharp decline into Friday's close, the indices corrected a lot more gradually off the support from last week's lows. This provided us with that more gradual reaction to support that we were looking for in order to support further downside. The volume declined steadily throughout the range, supporting a bearish bias since the upside volume within the range was so light.

http://tradingfrommainstreet.com/images/FocusLetter/20060307nas.gif

The market held the 15 minute 20 sma resistance, which is a typical resistance level for this sort of base, and began to favor the lower end of the range into the early afternoon after breaking the 5 minute 20 sma support out of the 12:00 ET reversal period. The selling continued much more quickly shortly after 13:00 ET. 13:00-14:00 ET is the most common time for a strong late day move to begin and since the market fell into a range out of the open, it favored the earlier end of that time frame to start to sell off.

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Volume increased dramatically once the selling pace began to pick up on Monday afternoon. After a light volume day up until that point, the market more than made up for itself with the selloff. Initial exhaustion took place around 13:30 ET. This allowed for the market to create a small bear flag on the S&P 500 and Dow. The downside then continued into 14:00 ET. It stalled only as it hit equal move support on the 15 minute charts and larger daily moving average support with the 50 day sma zone in the S&P 500 and Dow and the 100 day sma that had been holding up the Nasdaq for the past month.

http://tradingfrommainstreet.com/images/FocusLetter/20060307dow.gif

The slowing in the selling into the larger time frame support levels allowed for a rounding off at lows and a reverse head and shoulders or phoenix pattern on the 2-5 minute charts. This occurred then the pace started to pick up on the buying out of 14:30 ET and then sold off more gradually into the 15:00 ET reversal period, triggering a buy at that time. These lows held for the remainder of the day, although the overall pace of the buying never came close to that of the prior 15 minute decline.

As the week continues I will be watching primarily for another base or correction like that of Monday morning. Often the second correction will give back more in price off support than the first one, but the 15 and 30 minute 20 sma is still more likely to hold and present us with another short setup by late Tuesday morning or early afternoon. What I would not want to see would be the pace on the upside off the support yesterday afternoon begin to increase dramatically. There is the potential that instead of a three wave trend move down though, which would begin mid-day, that the market bases about 1.5 to 2 times the time it took to decline from Friday's highs before it starts to sell again. Either way, the primary bias into morning is continued correction from support followed by more selling.

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