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Market Rallies to Kick Off Shortened Week of Trade

Good day! As I mentioned this weekend, coming into the new and shortened trading week I had been looking for the market to correct off support from Friday's lows or lows in the first half of yesterday. I am expecting that these lows will lead into a continuation pattern on the downside on a daily time frame over the next couple of weeks. So far the action this week is holding this bias.

The Nasdaq Composite ($COMPX) has continued to outperform the rest of the market, but this will not yet be enough to keep it from also turning lower relatively easily. While the Dow Jones Industrial Average ($DJI) will have resistance at the 20 day simple moving average and have a more difficult time breaking the prior daily highs, the Nasdaq still has enough added strength that we may still see another slightly higher high. As long as it does not break by more than a day, however, this would simply create a trap pattern I call a 2T (think: 2 tops). It's a form of double top where the second high is just slightly above the first.

The difference in terms of relative strength between the indices was very pronounced on Tuesday. Although all the indices found support mid-day on Friday and began to turn higher, the Nasdaq had managed to close near the highs of the day. The S&P 500 ($SPX) and Dow Jones Ind. Ave. on the other hand closed near the day's lows. The Nasdaq futures then crept slightly higher on Monday and took off sharply to the upside out of Tuesday's opening bell. The index quickly overtook Friday's highs, but the S&Ps and Dow struggled with congestion in the middle of Friday's range and failed to break through highs.

The morning received a boost from data into the open and at 10:00 am ET. Ahead of the open the Case-Shiller home price index came out, showing a 14.4% drop over the past 12 months. This was the steepest drop in the 20-year history of the index, but the market rallied despite the news. Then, at 10:00 ET, the Commerce Department released more home sales data. New home sales rose for the first time in six months in April. Granted, this can easily be a bit of a "dead cat bounce". I must extend an apology to my kitties, but alas I did not give it that name! Further downside in housing is still to be expected, but after last week's downside exhaustion the market was looking for anything to grasp onto for its own bounce. Consumer confidence was not pleasant either, but apparently overlooked in the short run. The Conference Board announced that U.S. consumer confidence fell in May to a 16-year lows, while expectations of inflation grew. Yes, I said 16-year low. Yikes!


Just prior to the 10:15 ET correction period the indices began to stall and show resistance. The mini-Dow futures were testing their 5 minute 200 period simple moving average and the Nasdaq created a trap over Thursday's highs. The momentum was so steep on the upside, however, that the indices did not turn over quickly and instead they crept lower into the 5 minute 20 period simple moving average. This action in the indices on the 5 minute is very similar to what has taken place coming off this last daily high in the indices, so we have a decent chance of seeing similar pattern development on the daily time frame as seen in the morning trade in the indices on Tuesday.

After hitting the 5 minute 20 sma support, the indices hugged that support to create 5 minute Avalanche patterns. Volume dropped somewhat to indicate that further downside was warranted. This took place out of the 11:00 ET correction period and the follow through was very strong. The Nasdaq fell into support at Friday's highs, while the S&Ps found support at Friday's lows. These support levels hit at the same time as the 12:00 ET correction period and this led to a strong reversal once again into the afternoon.


The 5 minute 20 sma served as resistance initially at 12:30 ET. Congestion began along that resistance level, eventually breaking higher out of a Phoenix buy setup. The afternoon trade was significantly more choppy and erratic than the morning trade. This made timing continuation entries much more difficult since the indices made continuously slightly higher highs to creep to the upside until about 14:30 ET. At that point they rallied sharply before they continued to creep higher into the close.


The Dow Jones Industrial Average closed higher by 68.72 points, or 0.6%, on Tuesday at 12,548.35. Citigroup (C) climbed higher by 2.56%, while IBM (IBM) rose 2.51%. Du Pont (DD) was the top decliner by 1.3%, while Chevron (CVX) fell 1.14% along with the rest of the oil and oil services and related sectors. The S&P 500 rose 9.42 points, or 0.7%, and closed at 1,385.35. The Nasdaq Composite added 36.57 points, or 1.5%, to close at 2,481.24.