Good day! The market edged higher on Friday, resulting in the strongest weekly gain in the indices since last July. Some of the news abroad helped keep market participants in a positive mood. South Korea raised its interest rates, an action that was taken as a sign that the economy had stabilized and was showing improvement. Meanwhile, June's employment growth in Canada was stronger than anticipated. As a result, its unemployment rate dropped to 7.9%, which is the lowest it has been since January 2009. This has raised speculation that Canada will soon join South Korea with another rate hike of its own. The Bank of Japan will be announcing its latest interest rate decision on the 15th.
Dow Jones Industrial Average
Volume was light, however, as the week wound to a close. It was almost as if this Friday was the start of a three-day weekend instead of last! The indices began the session relatively unchanged from Thursday. They crept higher from there throughout the first hour and 15 minutes of trade. At 10:00 a.m. ET the market broke to slightly higher intraday highs after news that U.S. wholesale inventories rose 0.5% in May. This was in line with expectations. The momentum was fairly gradual even as the market climbed higher, however, and there was a lot of overlap in price from one bar to the next on a 5 minute time frame.
When the overall momentum is average-paced into a new high, this tends to result in a trading range. When the overall momentum on such a move is slower than average, then a strong reversal of the trend typically follows. On Friday, the overall upside momentum, while choppy, was not substantially slower than average. The market did not completely fall apart when the morning's uptrend broke lower. Instead, the indices formed an upside down "V" at the early morning highs and pulled back steadily into the 11:15 ET correction period.
Although the indices reacted nicely to support at 11:15 ET, the move lacked volume. The indices quickly fell into an even narrower trading range mid-day. Trading was very difficult in the indices from 11:45 ET into 14:45 ET. On a 15 minute time frame every candlestick overlapped the previous bar's range by more than 75%. We did start to see a directional bias for a breakout start to form at 14:00 ET, however, when the indices pulled back off the upper end of the range with slowing momentum. This correction also held more of the upper end of the trading range than previous pullbacks within the congestion. All three of the major indices had pulled into their 15 minute 20 smas at that point, which served as strong support levels and the trading range broke higher out of 14:45 ET. The breakout produced the strongest momentum of the session, rallying quickly to morning highs and then pushing throughout them over the course of the final hour of trade. The indices ended the week just a hair off Friday's late-day highs.
The Dow Jones Industrial Average ($DJI) ended the session on Friday at 10,198.03 with a gain of 59.04 points, or 0.58%. Nearly 2/3 of the 30 Dow index components posted a gain. The leaders were Caterpillar (CAT) (+2.45%), Travelers (TRV) (+2.12%), Alcoa (AA) (+2.05%), and Chevron (CVX) (+2.03%). The top losers were Johnson & Johnson (JNJ) (-1.37%), Microsoft (MSFT) (-0.57%), and Hewlett Packard (HPQ) (-0.51%). The Dow Jones Ind. Ave. as a whole ended the week higher by 5.3%.
The S&P 500 ($SPX) rose 7.71 points, or 0.72%, and closed at 1,077.96. The materials sector was the strongest throughout the session with Monsanto Co. (MON) (+7.31%) and AK Steel (AKS) (+5.44%) leading in the S&P 500. Other top performers were Marshall & Ilsley (MI) (+5.56%) and Harley Davidson (HOG) (+4.99%). The financials were also strong. The sector closed higher by 1.6%. The top losers were Sprint Nextel (S) (-2.95%), Verisign Inc. (VRSN) (-2.64%), and Laboratory Corp. (LH) (-1.71%). The S&P 500 ended the week higher by 5.4%.
The Nasdaq Composite ($COMPX) ended the session higher by 21.05 points, or 0.97%, and it closed at 2,196.45 on Friday. Research In Motion (RIMM) (+7.82%) was the top gainer in the Nasdaq-100, followed by Liberty Media (LINTA) (+4.48%), and KLA-Tencor (KLAC) (+3.83%). Google (GOOG) (+2.39%) also performed well after it was announced that its license to operate in China was renewed. This has been a major source of debate stemming from China's strict censorship policies. VRSN and Baidu (BIDU) (-1.70%) were the two weakest components of the Nasdaq-100. As a whole, the Nasdaq Composite ended the week higher by 5%.
The indices ended the week on Friday at a level of price resistance created due to price action over the past several months. While this slowed the buying ahead of the weekend, I still feel that the 50 day moving averages remain a magnet for this current daily rally. A correction within this rally on a 60-minute time frame would be normal, since most swings in the market take the form of two smaller waves, such as the decline off last month's highs, but ultimately I feel that we will see a retest of those 50 day smas before we get another longer daily correction to the current rally off the July 1 lows.
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.