Indecision Gives Way to Massive Selloff
Tuesday was quite similar to watching a train wreck where you see the stalled vehicle on the crossing, but no one is able to control the outcome. The day started on a sour note for the bulls, giving way to the Nasdaq's rounded highs and bearish bias in that index. The indices slid lower throughout the wee hours of the morning, gaining momentum as the opening bell approached. The NQ, which is the Nasdaq 100 Emini futures contract, opened lower by 14.50 points. The ES (S&P 500 EMini) opened lower by 9.75 points. The YM (mini-sized Dow) lost 86 points by the time it opened. In the indices themselves, The Nasdaq Composite ($COMPX) lost 25.40 points (-0.95%) by 9:45 ET, the S&P 500 ($SPX) had fallen 14.25 points (-0.9%), and the Dow Jones Ind. Average ($DJI) was already down by 121.6 points (-0.87%).
As I've discussed in the past, when the market has an extreme gap, it tends to try to close that gap in the morning and into the early afternoon. The two main exceptions are when there was already another similar gap the day before or when the market is at a major turning point. Due to the large daily resistance with the Dow 14k and all of the extended weekly and monthly charts, it is quite possible that the latter exception was the case on Tuesday. As such, I was not as aggressive on buying the gap right away this time around.
The indices immediately showed greater difficulty in attempting to fill that gap by falling into a trading range for the first hour of the day. This range did develop a bullish bias into 10:30 ET when the market began to hug the upper end of the range on declining volume. This created an upside breakout, but it lacked volume confirmation and the momentum was not sustainable. When the 11:00 ET reversal period hit at about the Nasdaq's 15 minute 200 simple moving average resistance, the indices rounded off at highs and pulled back into noon.
Strong price support hit in the indices when they retested the zone of the morning congestion, but they did not bounce right away. Instead the market slowed, congested a few minutes and rounded off at the support on the 1 minute time frame before pulling higher again. The Nasdaq was displaying the best relative strength by this point by closing a greater percentage of the morning gap and retracing off the highs by a lesser degree. The Dow and S&Ps, on the other hand, had almost returned to the morning lows on this pullback.
When the market bounced, it was much easier for the Nasdaq to establish new intraday highs, whereas the Dow and S&Ps ran into resistance from its previous highs at 12:30 ET. The Nasdaq strength surpassed the others to the extent that it even managed to completely close the morning gap with a move equal to its first intraday rally, but that price resistance hit right at the same time as the 5 and 15 minute 200 simple moving averages. In the Dow the 5 minute 200 sma and 15 minute 20 sma hit at the same time. and the S&Ps also ran into their own 15 minute 20 sma. All of these levels hitting at once halted this second upside move dead in its tracks.
Seeing the slowness of the Dow and S&Ps and general lack of decent intraday buy setups, I became very hesitant to buy anything into the afternoon. There was still the potential that the market would hug the 15 minute 20 sma and then break higher, although the trend placement was certainly not ideal for it. When that resistance had hit, I immediately favored the bears. The indices were back to the lower trend channel intraday by 13:30 ET. They then based there along the support with almost no price reaction, confirming the odds for a breakdown into the afternoon.
Once the 15 minute trend channel support did give way the indices barely cast a backward glance. All the typical support levels like 5 minute equal move, previous lows and moving averages stalled the moves, but we never got any decent 5 minute bear flag or base for the best types of continuation patterns. Instead they stalled only slightly at each support and soon continued lower. This selloff remained in play all the way into the last 15 minutes of the day when the market stalled again at daily price and moving average support.
By the end of the day, the Dow had lost 226.47 points (-1.6%), the S&P 500 lost 30.53 points (-2%), and the Nasdaq Composite fell 50.72 points (-1.9%). While the indices are now a bit extended on the downside intraday, it's now going to be difficult for the market to break to new highs without at least falling into a larger daily trading range. That would require a very rapid bounce on Wednesday. Moves like this usually do retrace somewhat the next day, although they can continue a bit into the open. I would expect the overall correction to any of this selling to be a lot more gradual overall than the selling itself though. The 30 and 60 minute 20 simple moving averages are the main resistance levels I would watch for.
Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.
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