In yesterday’s session the major market indices closed near their lows and the day before they closed near their highs. Today they dropped hard at the open retesting minor support levels. By mid-session they were on the mend and ultimately closed well off their lows forming hammer-like candles on the charts. Tomorrow they will likely open stronger, but ultimately the ability to hold higher levels into the weekly close will be key to determining their intermediate term direction.
What’s going on? Let’s take look at the charts.
The S&P 500 Index touched an intersection of resistance last week. At the time, we tweeted out about the event. This 2870 area of resistance is defined by the channel uptrend line the index has been trading in for the last four months, and the January high.
This test was followed by several days of decline and then the trap door open today. The DJIA was down over 320 points at one point in the morning before the indices began a mid-session recovery that eliminated nearly half their losses.
On the S&P chart, the retest of minor support at the 2800 level initiated its bounce, and a well-defined hammer candle formed at the close. The hammer is a bullish indication.
The NASDAQ Composite has been moving within the confines of a large rising triangle pattern. Today’s low retested the triangle support line and the 50 day moving average. As it approaches the apex of the triangle, it becomes increasingly likely that a decision will be made as to the future direction of the index. A strong move could could follow.
A break above the rising resistance line could trigger a move higher. We have seem hyperbolic moves after similar trading patterns. On the other hand, a break below pattern support and an intermediate to long term pullback could follow. There are several levels of horizontal support indicated on the daily chart.
The Dow also tested its 50 day average and ultimately formed a hammer candle on its chart. Things are looking a little more bearish on the Russell 2000 Small Cap Index.
It bounced off the support line of a rising triangle but remained below its 50 day average. The bounce was weak and the day’s price action formed a bearish engulfing candle on the daily chart. An engulfing candle did not form on the iShares Russell 2000 ETF chart.
So, while the day-to-day price action has been erratic, it has been playing out between well-defined levels of support and resistance on these index charts. If that is any comfort to whip-sawed traders.