Good day! Despite a strong showing to kick off the new week, the market struggled as Tuesday began. A number of factors influenced the morning's correction. To begin with, Monday's rally established a move on the 15 minute charts for the index futures that mirrored Friday's premarket and opening rally. This created upside exhaustion into Monday's close. A series of slightly higher highs then formed afterhours Monday and into the early morning on Tuesday. This created the Momentum ReversalTM pattern I wrote about in yesterday's column.
A Momentum ReversalTM is a strategy based upon the shifting momentum of a trend. In this case it was an uptrend on the 5 minute time frame. Although the trend remained an uptrend with higher highs and higher lows, the pace of the ascent dramatically slowed. When the lower end of the uptrend channel broke to the downside it triggered a short. It received some help overseas after the United Kingdom reported a disappointing gross domestic product for the fourth-quarter. The channel broke and the short confirmed around 3:00 a.m. ET.
Dow Jones Industrial Average (Figure 1)
By 5:00 a.m. ET the index futures were striking initial zones of support after two waves of downside reaction to the Momentum ReversalTM. There was a brief pop and a slower return to the zone of the 5-6:00 a.m. ET lows. This created another reversal formation called a 2B (think "two bottoms") that created the bullish bias discussed in yesterday's column heading into Tuesday's open. This pattern triggered shortly after 9:00 a.m. ET and followed through strongly for the next hour. This rally recouped the premarket losses, but the recovery was short-lived.
After hitting resistance at 10:00 a.m. ET, the market returned to opening price levels and then formed another short setup that triggered at 11:00 a.m. ET. By this point the indices were once again showing strong divergence. The Nasdaq-100 had substantially more strength than the Dow. While the Dow based at lows, creating an AvalancheTM on the 5 minute time frame, the Nasdaq managed a slightly higher high. This created a bull trap I call a 2TTM (short for "two tops").
The Dow and S&P 500 both broke to new intraday lows following the 11:00 a.m. ET sell signal, but 5 minute 200 sma support held in both the Dow and Nasdaq-100 around 11:30. From that point onward the 15 minute trend remained "wishy-washy". The downtrend remained barely intact in the S&P 500 and Dow, but the overall price action favored a trading range. The range was wide enough, however, that it was just the type of action daytraders and scalpers love. Support and resistance levels, as well as correction period, held extremely well and follow-through on triggered strategies was typically swift.