Focus Letter

Market Continues Monday's Downhill Slide

Good day! The bears did not give buyers much of a chance to gain a foothold on Tuesday as the morning progressed. After some initial selling out of the open, the indices did put in a larger correction than seen the prior afternoon, but it still was only a correction on the 5 minute charts. This was a lot shorter than I was expecting heading into the day, but the indices were not able to bust the 5 minute 20 sma resistance and were soon back to testing morning lows.

They broke through the morning lows out of the 10:45 ET reversal period. The Dow had the hardest time, falling into its 200 day simple moving average support zone before it was finally able to begin a larger correction on the 15 minute charts. The S&P 500 saw the best reversal pattern with a form of double bottom called a 2B out of 11:45 ET, but all three indices broke the morning downtrend channel going into noon.

Strong intraday volume near lows assisted with the mid-day move to the upside, but the pace was still only comparable to the prior selloff, leading to an end of the buying once the 15 minute 20 sma resistance hit at the 13:00 ET reversal period. Steady selling began into the middle of the afternoon. Action was very choppy and the indices hugged the 15 minute 20 sma until the final 30 minutes of the day.

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Usually the longer an index or stock bases along or holds a resistance level, the more likely that level is to break. An exception is if the base or time taken to hold the resistance lasts more than twice as long as the time it took for the index or stock to move into that resistance level. With a rally lasting an hour and 15 minutes off the 11:45 lows to the 13:00 highs, the correction into the afternoon low of 15:15 ET fell just within that time limit and the market busted out of the afternoon downtrend channel at 15:30 ET, closing well off the day's lows.

The Dow Jones lost the most on the day, falling 0.4% and 46.58 points to close at 11,002.14. The Nasdaq Composite came in second with a loss of 0.3% and 6.84 points. It closed at 2,162.78. The S&P 500 fell 1.44 points, or 0.1%, ending the day at 1,263.85. Home builders saw some of the largest losses. The sector fell another 2.8% after having already lost 3.9% on Monday.

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The indices are looking higher into Wednesday morning. The pace intraday was a lot more gradual on the afternoon selling than compared to the morning decline and then the stronger rally into the early afternoon. The larger time frames, however, merely suggest that continued correction off Tuesday lows can easily just be part of a larger bear flag on the 60 and 120 minute charts, so I feel it would be unwise to be too aggressive at this point on the overall market and instead better to just focus on the momentum and news plays for any buy setups.

I will be out of town for the remainder of the week to attend the International Traders Expo in Ft. Lauderdale, so have a great week and you'll hear from me again on Monday!