Whipsaw Day for the Market on Housing and Fed Data
Good day! As I completed yesterday's column the index futures had struck support into Tuesday's closing bell after a strong afternoon of selling. The support lent favor towards a correction at the lows in after hours trade, but the pace of the selling favored the creation of a bear flag on the 15-minute time frame. In the end, both held true. The index futures held the support level throughout the remainder of the evening and well into early premarket trade. Price action remained tame and congested even as the European markets opened. This created a slightly uptrending channel from Tuesday's close into approximately 9:00 a.m. ET on Wednesday morning that hugged the support zone of the 10 and 20 day moving averages zones in the three major U.S. indices.
Dow Jones Industrial Average
The futures began to show a shift in the intrarange momentum from 5-9 a.m. An Avalanche(TM) formed between 8-9 when the indices hugged the lower end of the 15-minute trading channel and triggered a strong break lower that began 30 minutes before the opening bell. Despite finding some intraday support between 9:40 and 10:00 a.m., the bear flag on the 15-minute time frame still had room to move before coming close to hitting equal move target levels as compared to Tuesday's afternoon descent. It was the 10:00 a.m. housing data that provided the push, although it likely would have continued despite the housing news.
Economists were anticipating a 20% decline in new-home sales, in large part due to the expiration of the government's homebuyer tax credit in April, but new-home sales actually plunged 32.7% in May to a seasonally adjusted annual rate of 300,000. This is the lowest level since the government first began tracking sales in 1963. In the West the decline topped 50%. In related news, the median sale price in May was $200,900. This is a drop of 9.6% year-over-year with prices hitting December 2003 levels. Additionally, the inventory of unsold homes rose, up from a 5.8 month supply in April to an 8.5 month supply, although the number of new homes was down to the fewest available since 1970. The market's reaction to the latest housing data was an immediate return of the earlier selloff.
After striking equal move support on the selloff as compared to Monday's selloff, the markets began to recover. The index futures pulled higher into their five-minute 20-period simple moving averages and then hugged the resistance from 11:00 a.m. ET into noon. The indices formed a Phoenix (TM) buy setup that gained momentum into 12:30, but the overall pace was still substantially slower than the morning decline. The indices were even forming a Momentum Reversal(TM) short into 14:00. This strategy triggered, but support from the 12:30 breakdown zone held when the FOMC reported the latest interest rate decision.
As expected, the FOMC left the target range for the federal funds rate at 0.00%-0.25% and the market had yet another weak reaction to the news since they also indicated that they favored keeping rates for "an extended period."
The Dow Jones Industrial Average ($DJI) ended the session on Wednesday at 10,298.44 with a gain of 4.92 points, or 0.05%. Just over 50% of the Dow's index components posted a gain. The top performers were Boeing (BA) (+1.77%), JP Morgan (JPM), Alcoa (AA), and Procter & Gamble (PG) (+1.09%). The weakest index components included General Electric (GE) (-2.53%), Chevron (CVX) (-2.35%), Microsoft (MSFT) (-1.79%), and Exxon Mobil (XOM) (-1.36%).
The S&P 500 ($SPX) fell 3.27 points, or 0.3%, and closed at 1,092.04. Although the housing data was dismal, home builders had a strong session. KBHome (KBH) was up 4.37%, while D.R. Horton (DHI) was up 2.45%, and Pulte (PHM) was up 2.14%. Jabil Circuit (JBL), however, was the top performer in the S&P 500 (+10.60%), followed by Peabody Energy (BTU) (+4.74%), Sprint Nextel (S) (+4.63%), and Big Lots (BIG) (+4.02%). Adobe (ADBE) was the weakest performer, falling 7.26% after it announced that profits did not grow as quickly as their sales. Anadarko Pete Corp. (APC) (-4.41%) and New York Times (NYT) (-4.18%) were other top losers.
The Nasdaq Composite ($COMPX) ended the session lower by 7.57 points, or 0.33%, and it closed at 2,254.23 on Wednesday. Bed, Bath & Beyond (BBBY) (+2.90%) was the best performer in the Nasdaq-100 ahead of its earnings announcement. BBBY was down afterhours. Despite beating earnings, it offered a weak forecast for Q2. After ADBE, Liberty Media (LINTA) was the weakest (-2.82%).
The market bias heading into Thursday remains bearish, but there has been the start of a shift in the pace of the downtrend channel on the all-sessions time frame, which includes post and premarket data. The indices have a fairly strong shot at pushing to a new low on the week, but the change in pace will make it more difficult to establish as strong of a drop as the previous ones this week.
Note: Unless otherwise stated, the index action described below relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same. All times are Eastern.
Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.