The Market Gets Ready to Beat a Retreat

 | Apr 30, 2013 | 3:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

QQQ

,

DIA

As this week's Federal Open-Market Committee announcement approaches, so does a daily correction in the overall market. After seven days of nearly uninterrupted buying, there are signs that the rally that began on April 19 is cooling.

Despite the intraday strength of the market on Friday afternoon and throughout most of Monday, over the past week the trading channels have been shifting, and the overall momentum on the upside has slowed. This has been the most apparent in the Nasdaq Composite, which will likely face the greatest difficulty in the remainder of the week ahead.

The intraday action in the Nasdaq, represented below in the PowerShares QQQ (QQQ), forged a series of three evenly spaced higher highs beginning in the afternoon of April 23. Each high served as a trap level for new bulls as the index quickly retreated, first from the previous highs of the month last Thursday, and secondly from the highs of the new channel itself at the end of yesterday's session.

QQQ 60-Minute
TradeStation

The intraday pullbacks resulted in the momentum shift that took place on the 60-minute time frame, forming a classic topping pattern in the index. Volume throughout the week also waned, as each new high was met with a lesser degree of enthusiasm.

The intraday action alone is not the only reason for the bulls to watch out this week. In the daily image below of the QQQ, notice that the index is currently testing not only the upper limits of the daily channel that began last November but last September's highs as well. Resistance levels are always the strongest when they are working together, and these are two powerful forms of price resistance.

QQQ Daily
TradeStation

Now that I've focused on the reasons why we should expect prices to correct, let's look at a few of the reasons this correction may wait until after Wednesday's FOMC announcement.

First of all, while the Nasdaq Composite has been shifting momentum on the 60-minute time frame, the corrections within that shifting channel have not been the most ideal for strong reversal. This is particularly true when looking at the correction that took place between the first and second high.

Rather than falling quickly and bouncing back with more of a "V" formation, the index fell into a trading channel before breaking higher (1-2). This created a slower overall correction than witnessed between the second and third highs. When this happens, it leaves room for a fourth high before a larger price retracement takes place.

The 60-minute chart of the Dow Jones Industrial Average, represented below by the SPDR DJIA (DIA), also gives me a reason to suspect that the intraday downside that was developing heading into today may not hold overnight. Notice that this intraday chart looks remarkably like the weekly chart of the same index that I showed you in Friday's column, in which I shared my views on the larger weekly and monthly price action.

The DIA also shifted momentum last week, but in Monday's session it was able to break through the upper end of that channel (B). This could merely be a trap, but because it also experienced slower downside action within the channel, it increases the potential to establish a measured move on the channel breakout (C) as compared with the initial rally heading into that channel (A).

DIA 60-Minute
TradeStation

As a general rule, I'm not a fan of holding short-term positions into FOMC announcements, and as you can see, the action that has been developing recently gives me an even greater incentive to wait. Although my bias is to the short side, I'll be focusing the intraday moves in the indices until the "cons" against another week-long pullback have diminished. I then expect to be looking more aggressively on the short side as we head into the second half of the week.

Columnist Conversations

HLF closed Wednesday trading at $43.63, down small with IV30™ down 3.2%. Conclusion HLF is down 40% sinc...
The Russell 2000 has led the broader market lower and today it returned to its 2014 lows, the bottom end of a ...
Here are the next potential support decisions to watch in SPX cash. Note that the current decline is only sim...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.