Ok, so much for the second flush on that 60-minute time frame being enough to lure in the bulls on Wednesday! When the week began, I had been watching for a three-wave push into lows on a 60-minute time frame before we would see a larger daily bounce. The upside action into the close on Tuesday, however, left me looking for more of a range in the morning on Wednesday and then an easier shot for the market to break higher without that third test. This possibility slipped away rather quickly, however, when the indices gapped higher and ran into strong price resistance from the zone of Monday's highs.

Hitting Monday's highs alone is not a nail in the coffin. How they hit those highs, however, was. Had the market simply continued the upside Tuesday afternoon and closed at highs and then continued into the prior highs coming out of that same swing higher on the 15-minute time frame, then it could have still formed a steady pullback or base along that resistance to create what would have essentially been an inverse head and shoulders pattern on a 60-minute time frame. This same pattern could have formed had it held the afternoon highs on Tuesday and continued to congest into the next morning, which is the direction I was leaning towards. Instead, the indices created a series of slightly higher highs on a 5 and 15-minute time frame.

This series of slightly higher highs created a form of momentum reversal creating a short setup. It is most apparent on the intraday chart of the Dow Jones Industrial Average whereby it rallied sharply Tuesday in the middle of the afternoon and then formed two more higher highs on Wednesday. Each higher high creates a trap and this pattern typically consists of two 2T setups in a row. A 2T is a form of double top with a slightly higher high on the second high of the pattern. When two of these form in a row, then a larger trend reversal becomes very likely. It is one of my favorite patterns.

Dow Jones Industrial Average ($DJI)


It was not until around 11:30 ET that the change in direction provided strong confirmation. At that point the early morning lows broke, as did the 15-minute 20 period simple moving averages. The momentum on the downside was strong enough to quickly take back at least half of the prior day's afternoon gains by 12:20 ET. The S&Ps and Nasdaq both formed 5-minute 2B patterns at that time. This is the 2T pattern in reverse. They attempted to go for the momentum reversal with a third low going into 13:00 ET, but did not quite make it. The slightly higher lowon light volume made it more difficult for the attempted afternoon rally to take hold and resistance held from the 11:30 ET breakdown zone.

S&P 500 ($SPX)


The market turned back over coming out of the 14:00 ET correction period. While this was the earlier breakdown level for price resistance in the indices, it was also the 15-minute 20-period simple moving average in the Dow, S&Ps and Nasdaq. The return of the bears was very subtle at first. Only an Avalanche on a 1 minute time frame provided confirmation of the reversal. Once it began, it chopped lower throughout the remainder of the session with very minor corrections in between. This made it one of those more difficult trends to jump in on once it was under way since the slower pace and greater overlap can create some rather sharp upside flushes with very little notice and typical measurements in terms of the amount of time a base or bear flag needs to be successful in a typical market does not apply as obviously when this type of action takes place.

The momentum on the late day descent was very comparable to that of the morning's move lower. This placed a target zone on the breakdown near the prior day's lows and slightly lower in the case of the Nasdaq. This meant that the market had returned to the earlier bias for a third low on the 60-minute time frame. This now creates a greater potential for a stronger move higher into next week.

A concern that I have is that the volume in the indices, while high, has not been extreme and lacks an exhaustion flush to the downside. I am also not fond of the fact that the 60-minute momentum shift has formed more of a fan formation with the channel between the highs and the lows since last Friday. Ideally this channel will be a descending parallelogram, so the conditions are not as favorable as our hypothetical pattern was, even though we now have the three lows.

Since we are heading into an extended weekend, and the markets close at 1:00 on Thursday, I will be sticking to daytrades within the first two hours and will probably be taking off a bit early after that since volume will drop off quite a bit past 11:00 am ET. This will give me the chance to reassess things ahead of the open on Monday based upon the reaction off this third low on the 60-minute.

Nasdaq Composite ($COMPX)


On Wednesday the Dow Jones Industrial Average ($DJI) fell 166.75 points, or 1.5%, landing at 11,215.51. General Motors suffered the greatest blow, falling 15.1% following a downgrade by GM. The S&P 500 ($SPX) fell 23.39 points, or 1.8%, and closed at 1,261.52. Each of the S&Ps 10 industry groups closed in negative territory. Energy and materials led with losses exceeding 4% each. The Nasdaq Composite ($COMPX) had the largest decline, selling off by 53.51 points, or 2.3%, and ending the session at 2,251.46.

Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.