Good day! The major indices were trading in a steady downtrend on the 30 minute charts for four straight sessions prior to Friday morning. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all gapped higher on Monday morning, extending their tests of daily resistance at the 50-day moving averages that we had been following in the prior week. When selling hit on Monday, it hit hard. The pace of that selling began to shift slightly going into the second half of the week with the indices establishing slightly lower lows on Thursday morning than on Wednesday, and then continuing lower into Thursday's close. As I mentioned in Thursday's evening edition, the indices were still favoring the bears heading into Friday morning, but I expected to continue to see a shift in the momentum to start to favor a stronger correction off lows heading into the new week.
The three major indices each established another slightly lower low on the 30 minute time frame on Friday morning, making it the third low in as many days. Each of these lows was evenly spaced over time, following two larger moves lower on Monday and Tuesday. This series of price action creates one type of trend exhaustion. Typically I prefer to see more of a change in momentum in the overall trend channel as the three slightly lower lows are made as compared to the initial decent, but the outcome still favors a break in the trend.
Dow Jones Industrial Average
On Friday the downtrend continued into nearly 11:00 a.m. ET. Selling was slow and price action was choppy in all of the indices throughout the session. Nevertheless, the market crept higher throughout mid-day and pushed into the upper end of the downtrend channel. This hit between 13:30 ET and 14:30 ET. It also corresponded to the 5 minute 200 simple moving average zone, which the Nasdaq hit perfectly. Instead of falling back like they had throughout the week, the indices held that resistance level. Trading remained choppy, without decent setups on even a 5 minute time frame in the indices, but the indices held onto the resistance zone.
The price action on Friday afternoon supported the notion I put forth on Friday that favored a break in the week's downtrend. By hugging resistance into the closing bell, the 30 minute downtrend is showing exhaustion. This also kicks off the start of a potential Phoenix(TM) on the 30 minute charts. A break in the 200 sma zone on the 5 minute time frame will confirm the setup. Such a breakout will have room to move on the upside that is at least comparable to the rally off morning lows and into afternoon highs on Friday. This would take the S&P 500 back to the zone of last Wednesday's highs.
The lower lows on the 30 minute time frame, albeit slightly lower than previous lows, still broke by more than is ideal for a larger price reversal off lows. This means that while the market has room for another upside push on the 30 minute charts early this week, in order to continue to hold up, there needs to be a better shift in the pace of the selling to sustain such a move. At this time, that seems unlikely. A continuation of the selling as the week progresses is currently more probable.
The Dow Jones Industrial Average ($DJI) ended the session on Friday at 10,143.81 with a loss of 0.09 points, or 0.09%. The gainers and losers were nearly evenly split, with the bears taking only a slight lead. The top gainers were the financials after the U.S. House and Senate finalized an agreement on financial regulation on Friday morning. American Express (AXP) (+3.92%), JP Morgan (JPM) (+3.71%), and Bank of America (BAC) (+2.66%) were the top three in the Dow with the overall financial sector up 2.8% on the day. The losers were Coca-Cola (KO) (-2.97%), WalMart (WMT) (-2.46%), and Microsoft (MSFT) (-1.88%). The Dow Jones Ind. Ave. ended the week lower by 2.9%, which takes it into negative territory for the year by -2.7%.
The S&P 500 ($SPX) rose 3.07 points, or 0.29%, and closed at 1,076.76. In addition to the financials, the market found strength in materials, such as gold, diversified metals and miners. The top gainers in the S&P 500 on Friday were Moody Corp. (MCO) (+6.84%), Marshall & Ilsley Corp. (MI) (+6.31%), Prologis (PLD) (+5.38%), and EOG Res. (EOG) (+4.96%). Education services, soft drinks, hypercenters and supercenters all showed weakness. The worst-performing stocks were Apollo (APOL) (-4.83%), Sprint Nextel (S) (-4.11%), Tyson Foods (TSN) (-3.19%), and Interpublic Group (IPG) (-3.14%). The S&P 500 fell 3.6% on the week as a whole, landing it in negative territory year-to-date as well, down 3.4%.
The Nasdaq Composite ($COMPX) ended the session higher by 6.06 points, or 0.27%, and it closed at 2,223.48 on Friday. Urban Outfitters (URBN) (+4.04%) was the best performer in the Nasdaq-100, followed by Priceline (PCLN) (+3.72%), and Wynn Resorts (WYNN) (+3.50%). The biggest loser was Research In Motion (RIMM), which dropped 10.84% on a mixed outlook despite a better-than-expected bottom line. APOL and Dish Network (DISH) (-2.52%) followed. The Nasdaq Composite is down 2% ytd after falling 3.7% last week.
Although the overall market was relatively unchanged on Friday, crude oil joined the financials and materials with strength in the session. Crude oil settled higher by 3.1% at $78.86 a barrel after hitting a high of $79.13. The rally was boosted by news of what could turn out to be the first hurricane of the season developing in the Gulf. The 20 day sma had hit on Wednesday and held into Thursday, so Friday's jump was supported by technical factors as well.
Friday's economic data had little impact on the day's actions. The final GDP reading for the first quarter of the year showed that the overall economy great at a rate of 2.7%. This was slower-than-expected. Meanwhile, personal consumption growth increased at a rate of 3.0%, while core personal consumption expenditures rose 0.7%. Later, the University of Michigan's final Consumer Sentiment Survey for June improved slightly to 76.0. This is its strongest reading since January 2008. May's personal income and personal spending data are due out Monday morning.
Note: Unless otherwise stated, the index action described in this article 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.
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.