Dow Holds 8K Resistance into Earnings Season

(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! The market gapped sharply lower for the second day in a row on Tuesday. This was also the third push lower on the 15 minute time frame. As on Monday, the selling continued immediately out of the opening bell for the first 15 minutes of the session. The S&P 500 hit its 15 minute 200 period simple moving average support level at the same time as the correction hit. The Dow Jones Ind. Ave. had a little more room before testing its own. This served as a magnet for the index and it continued to pull lower into the 10:15 ET correction period before finding support. At this point it had also closed the gap zone from April 2nd.

The pace of the overall selloff was much faster on Tuesday morning than on Monday due to a larger opening gap and stronger initial downside out of the open. This extended the trend move more rapidly than the previous day. The continuation in the Dow shifted the pace of that descent intraday and the markets held the 15 minute support extremely well.

Both the QQQQ, which tracks the Nasdaq, and the DIA, which tracks the Dow, also found price support at this time with $31.50 in the QQQQ and $78 n the DIA. When you are trading or following the indices, the whole number levels on the DIA and half number levels in the QQQQ offer additional cues for timing support and resistance. The SPY tracks the S&Ps, but I don't find the whole number type of support and resistance quite as reliable in it.

After turning higher off the lows, the market moved swiftly into the 5 minute 20 simple moving averages in the three indices. Stronger resistance was just overhead with the 15 minute 20 sma in the S&Ps and opening highs in the Dow, so the market pushed slightly past the 5 minute 20 sma. Fibonacci levels in the form of a 50% retracement on the S&Ps and 38.2% retracement in the Dow and Nasdaq combined with the other resistance levels on a little push into the 10:45 ET correction period and the market again began to pull lower into mid-day. Resistance levels are always the strongest when you have the greatest number of types of resistance hitting at approximately the same time.



The strength of the rally off lows helped prevent the markets from falling sharply back into the lows right away off the resistance, but the slightly higher high that took the indices past the 5 minute 20 sma also created a small bull trap. If the indices had hugged the moving average without that extra push at 10:45 ET then it could have created a text book Phoenix™, particularly with volume dropping off as it did so. In this case it would have also been the handle on a cup-with-handle pattern on the 5 minute time frame. Even though the markets held the 5 minute 20 sma zone into 11:30 ET, the slight break shifted the pace enough to prevent a strong Phoenix™ from taking hold. The choppy trade of the previous session and returned and the bears remained in charge. The 5 minute 20 sma support broke lower from the 5 minute 20 sma and the indices quickly returned to the level of the morning lows. 

Corrective moves that offer continuation patterns typically form with two waves of upside off the support in a congestive move. This formed along the lows on Tuesday mid-day and the indices broke down once again out of the 13:00 ET correction period. This was the second decent move of the day on the 5 minute time frame. The breakdown continued strongly for half an hour before hitting equal move support at 13:30 ET on the 5 minute time frame in the Dow and 15 minute time frame in the Nasdaq. At this same time the Nasdaq ran into support at the 15 minute 200 period simple moving average and 10 day sma.

From 13:30 to 15:00 ET the chop returned. Slightly lower lows in the S&Ps and Dow created a 2B buy setup on the 5 minute time frame out of the 14:00 ET correction period, but the market did not get very far. The 5 minute 20 sma held. The indices hugged this resistance level, however, and the result was a reverse head and shoulders pattern on the 5 minute time frame that triggered shortly before the 15:00 ET correction period. The market popped quickly back to the mid-day trading range before falling back once again into the close. Overall the session followed through with the expectation I expressed yesterday of more choppy overall trade punctuated by brief, yet rapid trend moves intraday.

The Dow Jones Industrial Average ($DJI) fell 186.29 points, or 2.3%, and closed at 7,789.56 on Monday. Nearly all of the Dow's 30 index components closed in negative territory. Citigroup (C) did manage a 1.47% gain, but losses such as the 11.89% decline in General Motors (GM) and a 5.94% loss in Caterpillar (CAT) overshadowed it.

The S&P 500 ($SPX) fell 19.93 points, or 2.4%, and closed at 815.55. Financials and consumer discretionary shares fronted the losses. Energy shares also faltered. Crude oil futures closed under $50 a barrel at $49.15 a barrel in New York.

The Nasdaq Composite ($COMPX) fell 45.10 points, or 2.8%, and closed at 1,561.61. 

The pace is continuing to shift in the markets on the 60 minute time frame over the past couple of weeks. This leaves more of a bearish bias forming, but the shift is not yet strong enough to rule out yet another attempted push into the resistance. At the moment I am watching for a pull back into the 20 day sma and then this additional attempt at a high before a longer daily correction once again kicks in.