Wednesday at noon, the Dow Jones and NASDAQ were both testing critical resistance. Here's an excerpt from my daily Market Chatter mailed out close to noon EST on Wednesday:
"We certainly don't like the action thus far today. A rather significant reversal is possibly underway at major price resistance. The NASDAQ is showing a shooting star doji with the upper tail just beyond the 2600-2608 price resistance we've discussed. The earlier high was 2611 with the NASDAQ at 2584 at last check. A finish there today would be bearish short-term.
The Dow Jones is also testing very signficant price resistance at 11613. It failed on yesterday's close, then was well above that resistance earlier today at 11713 before tumbling over the past hour or so back near the 11613 level. Again, a finish beneath 11613 with a long tail above it would not be a good sign for the bulls in the near-term.
Those who favor the short side have a great opportunity to jump in on shorts with much lesser risk than we've seen over the past couple weeks. That's what a light volume rally will do."
Take a look at the two charts below and then I'll discuss some of the comments above:
The NASDAQ lost critical neckline support in early August on massive volume. Yes, the bounce was nice. But we cannot assume that a critical resistance level like 2608 will be cleared. We have to SEE it first. The assumption is that it will fail until proven otherwise. Note the declining volume on both of these charts as prices moved higher to test resistance. Volume trends are horrible. It felt as though the market was being manipulated this past week. On Tuesday, consumer confidence fell from 59.2 to 44.5, one of the largest month-to-month declines I've seen. Yet the market's bounce continued almost unabated. Then on Wednesday, the bulls had their big chance. While the ADP employment change report missed estimates slightly, both Chicago PMI and factory orders absolutely blew past estimates. An intraday breakout resulted, but could not be sustained. Again, volume was light on the buying. On Thursday, the ISM index stayed above 50, beating consensus estimates (48.5). Once again, the market exploded higher intraday, moving past resistance only to fail into the close again. Volume remained light.
On Wednesday, the Dow Jones even managed to close EXACTLY at 11613. It wasn't 11614 or 11615. It was EXACTLY on resistance at 11613. We're left scratching our heads when the close occurs right on the biggest price resistance level on the chart. Thursday and Friday belonged to the bears, especially Friday after a dismal jobs report. Now the bulls can only tip their caps to the bears. The bears did at resistance what the bulls did at support - in tennis terms, they held serve. The problem for the bulls is that we're in a confirmed downtrend with very negative volume trends. Daily MACDs remain well below the centerline. That tells us that momentum remains bearish. It also suggests that the current range that we're in is most likely to break to the downside, in the direction of the prior downtrend.
It's going to be extremely important to follow the "beneath the surface" signals and sentiment. The S&P 500 topped when signals alerted me to the fact that the upside move was not sustainable. We're likely to see reversing signals ahead of time to the downside as well.
Happy trading!
- Tom
