Market Higher Following Thursday's Closing Momentum Buy Setup, but Fails to Hold Gains Following the Vote

(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)

Good day! After a weak session on Thursday, the session closed with a buy setup in place. The three afternoon lows in the Nasdaq Composite, made by breaking each of the prior lows only briefly, created what I have dubbed as simply a "momentum reversal" pattern. The combined pace of the channel made by the afternoon descent was a lot more gradual than the morning's drop. As I mentioned in yesterday's column, this pattern triggered right after the closing bell into afterhours trade in the index futures. When I had completed the column, the Nasdaq futures were hitting the first target level, which was where the momentum began to shift that afternoon. There was still plenty of room to move into the second target at Thursday's opening prices, but it was uncertain as to whether it would continue into that target in afterhours trade or wait until after the open.

In the end, the market did not continue right away. Instead the index futures fell into a trading range, congesting along the resistance from the initial price target. By holding onto this resistance, it left the indices bullish into the morning's economic data. At 8:30 am ET the Labor Department released September's employment numbers. The report revealed the largest job loss in over five years. Nonfarm payrolls fell 159,000 in September, following a 73,000 drop in August. Year-to-date, the economy has lost 760,000 jobs, a stark contrast to last year when it created 1.1 million new positions. The bleak report had the opposite affect it would typically have. Investors were cheered by the impression that it would put pressure on the House of Representative to pass legislation for a financial bail-out plan, which was coming up for a vote later in the afternoon, as well as increase pressure on the Federal Reserve to cut interest rates at the October 29th meeting.


The morning experienced its first correction with a pullback off the 9:15 ET correction period highs into support at the 10:15 ET correction period. The buying then resumed and the indices broke to new intraday highs around 10:30 am ET. At 10:00, the Institute for Supply Management released its nonmanufacturing index, which fell slightly to 50.2 in September, down 0.4 from August, but better than expected. Readings over 50 indicate expansion. This news had little impact on price action for the day.

Following the break to new intraday highs, the indices continued to climb until the 11:15 ET correction period. The Nasdaq formed a small momentum reversal short on a 1-2 minute time frame and the market rolled over into noon as buyers began to take profits ahead of the afternoon's House vote. This mid-day correction also corresponded to the second target on the momentum reversal pattern that had been in play since the previous day's close.

The volume in the market began to wane as lunch-time rolled around. This is typical every day, but speculation regarding the timing for the House vote also played a role. The indices pulled lower into 12:30 ET with three waves of downside off highs on a 2 minute chart. Earlier congestion from the morning's breakout served as support and the futures climbed steadily into the early afternoon when a vote began to appear imminent. The move higher hit strong resistance into 13:00 ET on a 15 minute time frame. At first there was some confusion as to whether the vote being broadcast on CNBC was on the Senate's amendment, which was reported initially and shown on C-Span, or if it was in fact the vote on the rescue bill. Once it was established that the vote was indeed for the passage of the bill and the numbers showed its likely passage the market began to sell the news.

The legislation was approved by a margin of 263 in favor to 171 against. The follow through from the vote's passage, however, was not unlike Monday's reaction to the failure of the House to pass it on the first go-around. On further consideration, many began to question whether or not this was the best course of action after all, and, if so, whether or not it would be enough, especially since the details of the plan are not yet apparent.

The initial aftermath of the House vote led to a closure of both the gap in the Nasdaq, as well as the Dow futures. The market took back all the gains it had made over the prior 21 hours in only about half an hour. This gap closure served as strong price support, leading to a correction back to the 5 minute 20 period simple moving average, but the breakdown was sharp enough to prevent it from being able to establish a complete recovery. Volume slowed as the correction off lows progressed and when the 5 minute 20 sma zone hit another wave of downside took over. All three of the indices broke to new intraday lows while the S&P 500 futures closed its gap as well.

As on Thursday afternoon, a third wave followed. It was more gradual than the first two, but also began off the 5 minute 20 sma and again took the market to new lows. This created a more extreme version of the same price action as the previous afternoon with all three indices closing at their lows. Since the pace of the selloff overall was more extreme than Thursday's, however, it will have a more difficult time mounting a strong price recovery on Monday. Although the weekly time frames now have an exhaustion move underway on the downside, I am favoring lower lows next week, focusing primarily on daytrades, with a recovery the following week. Due to the momentum on the weekly time frame, the market will have a difficult time establishing and holding any strong recovery in price. Instead, choppy, slower upside action off support levels should be expected.


Despite a gain of over 300 points when the House began to vote on the financial rescue bill, the Dow Jones Industrial Average ($DJI) closed lower on Friday by 157.47 points, or 1.5%, at 10,325.38. This amounted to a weekly decline of 7.4%. The Dow is now down 22.2% for the year and has fallen 27.1% since its highs on Oct. 9, 2007.

21 of the Dow's 30 index components lost ground on Friday. The leader was Citigroup (C), which had faired well earlier in the week after sharing that it intended to merge with Wachovia (WB). Surprised the news that Wachovia (WB) decided to join with Wells Fargo & Co. (WFC) instead, Citigroup was slammed by an 18.4% loss. J.P. Morgan (JPM) was the second biggest loser in the Dow, closing lower by 7.92%, while Bank of America (BAC) lost 5.20%. There were no particular standouts on the upside in the Dow. Most of them that had been up earlier in the session gave back the majority of their gains by the closing bell. Nevertheless, Merck & Co. (MRK) still held onto 2.19% of its gain, while Walmart (WMT) closed higher by 1.5%, and Pfizer Inc. (PFE) added 1.12%.

Taking a look at the other indices, the S&P 500 ($SPX) fell 15.05 points, or 1.3%, and closed at 1,099.23. The consumer discretionary and information technology sectors fronted the losses. 368 of the S&P's 500 closed lower. For the week overall the S&P 500 was down 9.4%. It has fallen 25.1% for the year thus far and is 29.8% off its October 2007 highs.

The Nasdaq Composite ($COMPX) also shed 1.5%, or 29.33 points. It closed at 1,947.39 for a loss on the week of 10.8%. 82 of the Nasdaq-100 stocks closed lower on Friday. The Nasdaq Composite is now 26.6% lower on the year and has dropped 31.9% since its Oct. 31, 2007 highs. This was the worst week for the market in more than 6 years.

Among the commodities, crude oil futures continued slightly lower by $0.09 to $93.88 a barrel on the New York Mercantile Exchange, while gold futures ended lower by $11.1, or 1.3%, at $833.2 an ounce. Last month both oil and gold futures ran into strong monthly price support from a level of congestion into the end of last year. They reacted to this support by bouncing sharply higher mid-September, but prices turned just as sharply and both are back to testing the monthly support zone once again. Given the current price action, it would be very easy for both of these to fall into a longer periods of congestion here on the weekly  time frame, holding the support zone once again throughout October.