Focus Letter

Intraday Range Continues to Progress Towards a Breaking Point

Good morning! Of the three major indices, only the Nasdaq Composite ($COMPQ) managed to close positively with a gain of 7.63 points. The Dow Jones Ind. Average lost 5.12 points while the S&P 500 fell 2.17 points. While the market did have a lot of strength out of the open, particularly in the Nasdaq which had been held down lately, when the 9:15 a.m. ET reversal period hit the buyers went into hiding. On the New York Stock Exchange the decliners outpaced advancers by 9 to 7, while they were fairly evenly matched in the Nasdaq. A lot of the weakness in the S&P 500 came from the more heavy representation of home builders, energy, and oil service stocks, which led in bearish action.

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Just as much of the upside intraday took place out of the open on Monday, the largest intraday decline also occurred early on. This came in the form of three short waves of selling on the 5 minute charts going into the 10:45 ET reversal period. This closed the morning gap in the Nasdaq and took the weaker S&P500 under the lows of the prior two days to close last Thursday's gap as well.

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When the market has three waves of buying or selling that are broken up by comparable corrections, we will typically see a larger correction to follow. This held true on Monday as well when the market pivoted into lunch and began to gradually move higher. Since the pace of the selling was stronger than average in the morning, this mid-day reversal took a bit more time. The Nasdaq was able to put in the greatest recovery, but the pace was never able to equal the prior downside as a whole and the morning highs held in that index. The weaker S&P 500 did not make it past its 5 minute 200 sma resistance, however, and hugged the lower end of its intraday range when the afternoon reversal periods hit.

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The 13:00 ET reversal period held very well with the intraday resistance zones and the selling again began to pick up. It increased into 13:30 ET, but once the market ran into prior lows intraday things became rather choppy on the smaller time frames. Often the market will break lower when it hugs support as well as it did from 13:30 ET onward. The pace within the narrow range itself was never able to adequately turn over to favor the bears, however, despite the larger 5 minute chart hugging support and the range ended up holding into the close.

We now have three days in a row with narrow trading action in the S&P 500 and Dow. Most 15 minute trends last 2 1/2-3 days before breaking. While this is particularly true of uptrends and downtrends where the 15 minute 20 sma serves as support or resistance for that amount of time before it has to put in a greater correction, narrow intraday trading ranges typically also follow this pattern. Due to the change in pace on the 15 minute charts intraday on Monday, the bias is now favoring bears, but it's not really giving any strong short setups due to a lot of rapid upside flushes.

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