Intraday Plunge Shocks Bulls

Jun 6, 2008: 1:20 PM CST

With two hours of trading left, the US Stock Market indexes have shed over 2% of their value from yesterday’s close.  Let’s learn a lesson from the intraday price movement so far and see where the charts may wind up for the day.

First, the @YM Dow Mini June Futures Contract 5-minute chart:

Be sure to click the image for full size.  This chart was created with TradeStation and shows the Dow-mini futures contract shedding over 300 points from 7:00am this morning.

The lesson from the chart is the developing momentum divergence, which is calling for a pause or potential ’rounded’ or ‘rolling’ reversal in price to stall future massive intraday selling.

The zone labeled “trapped” provided excellent opportunities for ultra-short term traders to have well-defined support and resistance levels for scalp-style trading – behaviors I engaged in on the 1 minute chart which showed clean price swings despite the prior down move.  We expect consilidation after a large down move so there’s nothing wrong with playing short-term support and resistance that develops in the rangebound consolidation phase that is expected after a large volatility move (especially if you missed the large move for whatever reason).

Most traders indeed did miss this move because it was an ‘overnight occurrence’ that was reflected with a large gap in the index ETFs.  The “gap fade” strategy isn’t as attractive with gaps greater than 1%.

Be on guard for any afternoon breakout, but for the moment (until something changes), it wouldn’t surprise me to see a continued trading range with some sort of trend move of some sorts into the close.

Where does this leave us on the daily chart?  I mentioned previously that the market – particularly the Dow Jones – was facing an interesting juncture.  It appears the move was as the charts (and I) expected when price tested its converging 20 and 50 period moving averages – a move to the downside:

Next stop:  I interpret the odds to favor a test at least of the 12,000 zone, which now stands only 300 Dow Points away.  I made that market call (Market Beginning a New Down-Swing) embarrassingly just before yesterday’s 1.5% surge.  Now, I don’t feel so silly with the market engulfing yesterday’s gains and more.

It will be interesting to see what happens when the dust settles, and what the technical damage (if any) will be to certain key stocks and sectors.

As always, check out the Market Club for additional resources, scans, and commentary.

Note – the market actually gapped lower, however the way the Dow Jones is calculated, the index charts never show any gaps (which leads to visually appealing, though technically inaccurate charts).

Comments Off on Intraday Plunge Shocks Bulls

Comments are closed.