Good day! The market offered up a nice continuation on Thursday morning of the selling that began several weeks ago. This selloff was the morning action I wrote about in yesterday's column and the S&P 500 performed slendidly, hitting the 30 minute equal move target zone by 11:15 a.m. ET. This equal move level took place on the larger 30 minute charts comparing the breakdown beginning Tuesday to the one the previous week, as well as Thursday's selloff to the one that took place into Tuesday morning (shown in blue on the chart below).
Although the indices had the technical bias for a selloff, the day's economic data didn't hurt that bias at all. The index futures were creeping higher ahead of the 8:30 a.m. ET jobs data, creating a gradual uptrend channel that provided greater support for a bearish breakdown. The first attempt to break this channel took place when initial jobless claims hit 472,000 last week, about 14,000 more than expected. The initial reaction was sharply negative, but the index futures were able to bounce back to the upper end of the trading channel around the start of the intraday session.
Dow Jones Industrial Average
The dismal data did not end there, however, and helped influence the price action following the opening bell. An initial turn lower intraday took place as the index futures tested upper channel resistance, but it wasn't until the 10:00 ET data came out that the markets solidly broke through the lower end of that premarket channel.
Pending home sales for May fell 30% month-over-month with the worst decline on record. The market was expecting this number to be weak after the government credit for home sales expired at the end of April, but it didn't help the mood. Then the ISM Manufacturing Index came out. Analysts were expecting a reading of 59.0, but were hit with 56.2 instead. This is the lowest level in 6 months. The selling pressure intensified following these releases and took the market into our target zone.
The target zone held very well in the indices. The market pivoted strongly heading into 11:15 ET and created a "V" type of bottom. This type of action usually leads to a trading range. The first resistance level hit at 11:45 ET. A slow pullback on the 5 minute time frame took place into 12:30 ET, creating a Phoenix (TM) buy setup into the early afternoon. The setup hit its target a mere 15 minutes later and the indices began to form a bull flag on the 5 minute time frame to create another continuation setup to the upside. The flag triggered early, however, and the result was a smaller move higher into 13:30 ET than the previous 5 minute rally. Another push higher led to a second slightly higher high, resulting in a Momentum Reversal (TM) short setup out of 14:15 ET highs. The rest of the day was then spent within a narrow trading range.
The Dow Jones Industrial Average ($DJI) ended the session on Thursday at 9,732.53 with a loss of 41.49 points, or 0.42%. 6 of the Dow's 30 index components posted a gain. The top performers were Mc Donalds (MCD) (+1.28%), Microsoft (MSFT) (+0.65%), AT&T (T) (+0.62%), and WalMart (WMT) (+0.56%). The biggest losers were Bank of America (BAC) (-2.44%), General Electric (GE) (-2.08%), Merck (MRK) (-1.52%), JP Morgan (JPM) (-1.31%), and Intel (INTC) (-1.03%).
The S&P 500 ($SPX) fell 3.34 points, or 0.32%, and closed at 1,027.37. 3 of the 10 industry sectors managed a gain. Consumer discretionaries were up 0.8%, telecoms were up 0.4%, and consumer staples were up 0.2%. The top declining sectors were financials (-0.9%), health care (-0.8%), and materials (-0.7%). Frontier Communications Corp. (FTR) (+8.16%) was the biggest gainer in the S&P 500 after it announced that it closed a deal for the acquisition of phone liknes in 14 states that belong to Verizon Communications (VZ). Ford (F) followed with a gain of 4.86%, while Abercrombie & Fitch (ANF) rose 3.98%, and Carnival Corp. (CCL) climbed 3.54%. The top losers included Tesoro Corp. (TSO) (-5.23%), Sunoco (SUN) (-4.95%), Newmont Mining (NEM) (-4.45%), Keycorp (KEY) (-4.16%), and Perkinelmer (PKI) (-4.16%).
The Nasdaq Composite ($COMPX) ended the session lower by 7.88 points, or 0.37%, and it closed at 2,101.36 on Thursday. About half of the Nasdaq-100 posted a gain. The top performers were Nii Holding (NIHD) (+4.55%), Marvell Technology (MRVL) (+3.43%), and First Solar Inc. (FSLR) (+3.18%). The biggest losers were Warner Chilcott (WCRX) (-3.06%), Qualcomm (QCOM) (-2.68%), and KLA-Tencor (KLAC) (-2.58%).
Gold and oil were two of the top movers on Thursday as well. Gold prices plummeted off recent highs, landing at $1207.80 an ounce for a loss of 3.1%, while Crude oil futures fell 3.5% to $72.95 a barrel.
The market is still showing weakness going into the holiday weekend with momentum still more gradual overall on the upside than the downside, but the indices are also very extended on the daily time frame. This will make it difficult to push much lower without a reprieve. I would prefer to see another test or two of the zone of lows with slightly lower lows taking place before the market tries to correct off this support zone. This would help add momentum to a bounce. The market does currently favor such action as well. This means that setups forming on the downside in the indices should be treated with an intraday approach, while those on the upside should already be showing signs of stronger upside momentum developing (such as more gradual selling compared to the overall market). Also expect volume to be lighter-than-average throughout the session, dropping off heavily after 10:45 a.m. ET as market participants wind down into "vacation mode" heading into the 4th of July.
Have a safe and enjoyable three-day, holiday weekend!
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.