Good day! Throughout most of the week last week the market struggled at the 50 day moving averages in the S&P 500 and Nasdaq Composite. These were the strong resistance levels I had pinned down a week earlier as a solid level for the market stall at on the rally off the month's lows, but when it hit the momentum was strong enough that the indices started to show potential to push through that zone and continue into the 100 day moving averages in the three major indices. In order for that to happen, however, as I mentioned in Friday's column, we would need to see a shift in momentum within the trading range itself that favored an upside breakout. The best way is for downside momentum within the range to slowed as compared to the upside. This tends to happen just prior to a breakout on the upside. Downside breakouts are more often preceded by slower upside momentum within the range just prior to the channel breaking.
We did not see that shift in momentum continue to favor the bulls going into Friday's session. In fact, the market decided immediately on Friday morning that no such shift would take place. Instead, the indices gapped lower into the opening bell on Friday and quickly broke through the lower end of Thursday's gradual uptrend channel. This decided the fate of the trading range once and for all in favor of the bears. By breaking Thursday's trading channel with such momentum, an AvalancheTM type of pattern was triggered on the short side on the 30 and 60 minute time frames.
Dow Jones Industrial Average
The market felt pressure across the board after both Bank of America (BAC) and Citigroup (C) reported disappointing quarterly revenue. These reports weighed heavily on the financials, which were the week's poorest performers. The sector fell nearly 3% by week's end.
The morning's earnings reports were coupled with a strong drop in consumer sentiment and a nearly flat reading on consumer prices, which suggested that inflationary pressure had dropped to virtually nil. The Reuters and University of Michigan's consumer sentiment index fell to 66.5 in mid-July, which is the lowest it has been in 11 months. This was a dramatic and unexpected blow. Just last month the index had hit its highest level in 2 1/2 years. Consumer prices, meanwhile, were down for the third month in a row, falling 0.1% in June. The data was strongly impacted by falling energy prices. Excluding food and energy, the core CPI rose 0.2%.
The indices found support intraday shortly after 10:00 a.m. ET. This was the gap closure zone from earlier in the week, as seen on the 15 minute time frame. The indices congested at this level with declining volume into the 11:00 ET correction period and 5 minute 20 period simple moving averages. This created an ideal setup for further downside into noon. The indices failed to form solid setups on the 5 minute time frame from that point forward. Instead, they slipped lower throughout the remainder of the session, sliding down the 5 minute 20 sma right into the closing bell. By the end of the day the three major indices were all hitting their 10 day moving averages, which held as support into the weekend.
The Dow Jones Industrial Average ($DJI) ended the session at 10,097.90 with a loss of 261.41 points, or 2.52%. Every single one of the Dow's 30 index components posted a loss on the day. The biggest losers were Bank of America (BAC (-9.16%), Cisco (CSCO) (-4.89%), American Express (AXP) (-4.72%), General Electric (GE) (-4.59%), and Home Depot (HD) (-4.34%). The retailers were negatively affected by the consumer sentiment report. Telecoms, while lower, held up better than the rest. AT&T (T) fell 1.24%, while Verizon (VZ) was only down 0.41%. The Dow ended the week lower by 0.98%.
The S&P 500 ($SPX) fell 31.60 points, or 2.88%, and closed at 1,064.88. Only about 2% of the S&P 500's index components posted a gain on Friday. The strongest, which posted gains over 1%, were Schwab Charles Corp. (SCHW) (+4.05%), Genuine Parts Co. (GPC) (+2.56%), Apollo Group (APOL) (+1.76%), and Tellabs Inc. (TLAB) (+1.48%). Gannett Inc. (GCI) (-10.66%) posted the largest loss, followed by Mattel Inc. (MAT) (-9.52%), Bank of America (BAC) (-9.16%), and Gilead Sciences (GILD) (-8.48%). The S&P 500 as a whole ended the week lower by 1.21%.
The Nasdaq Composite ($COMPX) ended the session lower by 70.03 points, or 3.11%, and it closed at 2,179.05 on Friday. Only 3 components of the Nasdaq-100 managed to end the day with a gain: APOL, Hunt JB (JBHT) (+0.92%), and Warner Chilcott (WCRX) (+0.71%). MAT, GILD, and Google (GOOG) topped the losers in the index. GOOG's losses followed Thursday's afterhours earnings report in which the company failed to meet analysts' expectations. The Nasdaq Composite ended the week lower by 0.79%.
The biggest drag for the Nasdaq last week was Apple (AAPL), which fell nearly 4% on concerns with the antenna on its new iPhone 4 whereby holding it barehanded in certain positions can affect the phone's reception. This results in frequently dropped calls. Apple announced that they will be offering protective cases for the phones in order to prevent further difficulties of this nature.
Now that earnings season is in full swing, be sure to check out the day's announcements when considering holding positions overnight. This includes watching for stocks that will be impacted by earnings within the sector you are trading. A few to keep an eye on this week will be IBM and Halliburton (HAL) on Monday, Goldman Sachs (GS), Pepsico (PEP), and Apple (AAPL) on Tuesday, Coca-Cola (KO) and Morgan Stanley (MS) on Wednesday, Microsoft (MSFT), Caterpillar (CAT) and 3M (MMM) on Thursday, and McDonalds (MCD) and Ford (F) on Friday.
In Friday's session, the pace of the selloff slowed in the afternoon in comparison to the morning's descent. This will make it easier for the indices to recover some of their losses into Monday, although the overall daily bias continues to favor corrective activity off last week's highs with at least a daily trading range. Earnings will have a strong impact upon how this correction plays out, so I am considering this to be a daytraders market with swingtrades higher risk except in stocks that have already posted earnings and are not highly impacted by the overall market direction.
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.