Focus Letter

Market Continues Its Preference For Strong Intraday Reversals

Good morning! After slower selling into Friday's close, the market saw a strong upside move to kick off the new week on Monday morning. It began with a decent, but not extreme gap higher, taking the Nasdaq into Friday's highs which served as resistance. The S&P 500 and Dow Jones Industrial Average also ran into resistance right away with the 5 minute 200 sma in the EMinis and the 15 minute 200 sma in the ES (S&P 500 EMini). The rally continued throughout the remainder of the morning, although the pace remained choppy, especially in the Nasdaq, and slowed down considerably into lunch.

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The change in the upside pace to favor a more gradual move occurred, in part, due to strong overhead resistance on the 15 minute charts at prior highs in the Nasdaq and S&P 500 and the 15 minute 200 sma in the Dow. Once the 12:00 ET reversal period hit, so did the selling. It began slowly at first, pulling into 5 minute 20 sma support where the market formed a small Avalanche pattern by hugging that moving average and then breaking it to trigger a short. The pace on each of the waves of selling from that point on into the close increased.

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The market found some initial support at the 13:00 ET reversal period. This led to a slow correction into the 14:00 ET reversal period which was followed by a rapid decline into the 5 minute 200 sma support level in all three indices. This was also morning lows in the Nasdaq. Another bear flag developed, but it triggered faster than normal, not even waiting for the 5 minute 20 sma resistance. This was likely due to the increased pace of the last selloff and the fear it brought about in bulls who may have felt the morning upside meant a completion of the recent daily retracement off highs in the Dow and S&P 500. This last flag continued until both the S&P 500 and Nasdaq both closed the morning gap.

http://tradingfrommainstreet.com/images/FocusLetter/20060404dow.gif

When it was all said and done, the actual results on the day did not seem like such a big deal. The Dow ($INDU) closed up 35.62 points at 11,144.94, while the S&P 500 ($SPX) gained 2.98 points to end at 1,297.81. The Nasdaq Comp. was the only one to close lower, falling 3.05 points to end at 2,336.74. It's only when you look at the whole picture does the extent of the intraday action come into focus. The Dow had session highs of 11,247.87, a 138.55 point gain. The S&P 500 had gained 13.84 to put in highs of 1309.19, while the Nasdaq had intraday highs of 2,357.53, up 16.47 points.

Although this leaves the intraday charts very extended to the downside, the daily charts of both the S&P 500 and Dow are both now more likely to test the 50 day sma support and break the 20 day one more solidly. I still think we are a couple of days away from seeing decent swingtrades begin to set up again on the long side and possibly several months for position trades to start to be more favorable once again.

UPCOMING MENTORING OPPORTUNITIES:

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