Good day! The market put in an impressive performance on Wednesday with both the S&P 500 and Nasdaq Composite rallying more than 3% on the day. This move to the upside was in line with our expectations heading into the session. As I discussed in yesterday's column, the market activity and support from the past week created a combination that favored a corrective move to the upside coming off lows this week and so far the market has listened.
Dow Jones Industrial Average
Wednesday's action in the overall market was stronger than I had expected though. By the time the closing bell rang the indices had established their strongest daily gain in about 6 weeks. The move was purely technical without any major news moving the markets. Volume was once again light throughout most of the session, although it picked up somewhat into the close. Interestingly, lighter volume moves can often be more extreme than an average volume day since fewer available shares means that those who feel strongly about a price move will pay up in order to get a fill. This can drive price changes more quickly than when it is easier to get in and out thanks to higher volume.
The intraday market action was pretty smooth from a technical standpoint. The indices had an initial trend to the upside that completed by the 11:00 ET correction period. This consisted of three waves of buying on a 2 minute time frame. This left the trend extended and exhausted on the short term into mid-day, but the pace of the uptrend meant that the market was not likely to mount a strong reversal. At the same time, it meant that the trend would not have an easy time continuing without a longer correction over time. The market formed this correction between 11:00-13:00 ET. Both the S&P 500 and Dow Jones Ind. Average hugged the 15 minute 200 sma resistance zone at this time, while the Nasdaq was dealing with resistance from Tuesday's highs.
The market followed through on the early morning breakout with a rapid break to new highs. This move was not as strong as the morning rally, however, and stalled easily. The 5 minute 20 sma served as support for the indices and the market once again broke higher in the final hour of trade, but the afternoon action in the markets as a whole was a lot more choppy than the price action prior to noon. All three of the major indices ended the session at highs.
The Dow Jones Industrial Average ($DJI) ended the session on Wednesday at 10,018.28 with a gain of 274.66 points, or 2.82%. WalMart (WMT) was the only Dow component to not post a gain of more than 1.4%. It rose a paltry 0.72%! The telecoms (VZ) (T) were the next weakest. The big movers for the day were Cisco (CSCO) (+5.34%), JP Morgan (JPM) (+5.01%), American Express (AXP) (+4.95%), General Electric (GE) (+4.65%), and Bank of America (BAC) (+4.62%). As you might have guessed by these numbers, the financials were the day's top performers. The overall sector rallied a remarkable 4.4% as a whole.
The S&P 500 ($SPX) rose 32.21 points, or 3.13%, and closed at 1,060.27. AES Corp. (AES) (+10.79%) was the biggest gainer in the S&P 500. It was followed by a gain of 9.87% in State Street Corp. (STT), an 8.94% gain in AK Steel (AKS), and a gain of 8.86% in Cliffs Natural (CLF). STT's gains followed a fiscal-second-quarter profit outlook that beat expectations. Only eight S&P 500 index components posted a loss. Four lost more than 1%. They were Family Dollar Stores (FDO) (-8.06%), Life Technologies Corp. (LIFE) (-1.30%), Vulcan Materials (VMC) (-1.29%), and Waters Corp. (WAT) (-1.12%). FDO's loss followed third-quarter earnings that beat expectations, but the stock price fell when it added that it expects fourth-quarter earnings to fall below what analysts had been expecting.
The Nasdaq Composite ($COMPX) ended the session higher by 65.59 points, or 3.13%, and it closed at 2,159.47 on Wednesday. LIFE and Qiagen (QGEN) (-1.85%) were the only losers in the Nasdaq-100. Baidu (BIDU) (+7.29%) was the biggest gainer, followed by Altera (ALTR) (+6.78%), Netapp (NTAP) (+6.68%), and Broadcom (BRCM) (+6.33%).
My daily bias for the market has not changed since last weekend. I expect the market to continue to hold last week's lows for the near future. There is still the risk of greater day-to-day overlap in price, but Wednesday's action did shift the momentum of this correction off lows to help out the bulls. This will make it easier for the indices to pull up into the 50 day moving averages before another change in the swing direction on short-term daily trends takes place.
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.