Commodities Surge While Larger Market Faces Strong Selling Pressure

06/30/2008 12:00 am EST

Focus: STOCKS

Toni Hansen

President and CEO, Trading From Main Street

Good day! Well, being away from the market for most of this past week sure left me missing all of the excitement! Yikes! Even though the indices had managed to correct off some support on Wednesday with the help of a run-up into the Fed, the sentiment had turned into the closing bell. The index futures continued to spiral lower into the opening bell on Thursday. The indices then held near opening lows throughout the first 15-minutes of the session. As you may recall from past columns, if this 15-minute low breaks after such a gap, the odds are strong that the session will turn into a downtrend day. What a day it ended up being at that! The trend continued into Friday as well, although the intraday price swings were larger.

Dow Jones Industrial Average ($DJI)

Thursday's selloff continued into the first 15-minutes following the opening bell on Friday before finding support at the 9:45 ET correction period. The market popped rather quickly off this low, but the 5 and 15-minute 20 period simple moving averages held back the bulls and momentum shifted once gain coming off the resistance. This led into a small Avalanche pattern on a 2-minute time frame that took the indices to new intraday lows, albeit just barely in the case of the S&P 500 ($SPX) and Nasdaq Composite ($COMPX). The Dow's ($DJI) Avalanche was lower in the intraday range, so when it triggered it was able to break to a more significant lower low on the session, whereas the S&Ps and Nasdaq had further to go before those initial lows hit. The result was that in those indices the morning lows served as a support zone, so the slightly lower low created a type of double bottom bear trap known as a 2B (Hint:think: "2 bottoms").

S&P 500 $SPX)

Despite the 2B reversal pattern coming out of the 11:00 correction period, the momentum was unable to turn over easily. Instead the indices crept higher into 12:20 ET. At this point they once again tested the 15-minute 20 period sma resistance. This also created a two-wave correction on the 15-minute time frame. These are strong continuation patterns in the direction of the larger trend, which favored the downside.

After pausing for a few minutes at morning support, the indices continued their afternoon breakdown. They pushed to new intraday lows coming out of 13:00 ET. Unlike many intraday reversals, the market did not find support at a correction period, such as 13:30, or, more significantly, 14:00 ET. 14:00 ET, however, did correspond to the break in the early afternoon downtrend channel.

Since the momentum on the downside was about average, the market was able to turn around rather easily off the lows. A "V" type of formation is typically when a move is neither faster nor slower than average, and it often leads into a longer period of congestion. In this case, the momentum did increase a bit more quickly than it would in a simple "V", but the larger range for the day prevailed and resistance levels from earlier price levels held at 14:30 ET in the S&Ps and Dow and around 15:00 ET in the Nasdaq. The remainder of the session was choppy and the market closed at about the same level it had been at 90-minutes earlier.

Nasdaq Composite ($COMPX)

The Dow had the strongest decline on Friday. It had fallen nearly 360 points on Thursday and added another 106.91 points to that loss on Friday. It closed down 0.9% on the session and 4.2% lower on the week at 11,346. So far the index has pulled back almost 20% since its October 2007 high of 14,165. The S&P 500 faired slightly better, losing 4.77 points, or 0.4%, on Friday and 3% on the week to close at 1,278.38. This is just over an 18% correction off last October's high of 1,562. The Nasdaq Composite closed lower on Friday by 5.74 points, or 0.2%, at 2,315. It had hit a high last year of 2,861.51. Meanwhile, oil broke over $142 a barrel and gold also soared higher with strong swingtrade setups on the upside triggering on Thursday for muli-day to multi-week holds.

Going into the start of last week we had been looking for continued downside on the week. The follow through was particularly compelling. Even though the indices have hit support again on Friday and now look to move higher on Monday (which I would want to see confirmed early on in order to avoid one more break lower on a 15-minute time frame), the larger reversal on the weekly chart has been confirmed. Both the S&P 500 and Dow Jones Industrial Average have established three waves of selling on the daily time frame, which now extends those trends.

I would like to see a two-wave correction off the lows for a stronger continuation pattern on the downside on the weekly time frame now. The Nasdaq has only had two waves since highs, so it can still trade places with the other two indices and have a more difficult time correcting off lows and instead break to a third low on the daily time frame before it puts in a larger correction off support.  Due to the downside already this month, I am finding that my watch lists are now rather meager on a daily time frame, so my focus will be on intraday activity instead for most of this week.

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