Equities shrug off weak housing and earnings data

Good day! The market recovered from a triple-digit morning loss in the Dow to close in positive territory on Tuesday. The session began with a strong gap lower into the opening bell following disappointing earnings and another dismal housing report. The index futures sold off sharply following Monday's closing bell when both IBM and Texas Instruments posted disappointing revenue to accompany their earnings reports. They recovered a lot of their losses after hitting support at Monday's lows, but were at resistance levels once again by midnight. The momentum shifted at this point and the futures turned lower into the early-morning hours.

Dow Jones Industrial Average

The market picked up momentum on the downside with each wave of selling in the premarket. The index futures established their third leg lower on a 5 minute time frame into 6:00 a.m. ET to exhaust the downtrend. This occurred was well ahead of the 8:30 a.m. ET housing numbers. The futures were recovering from that third wave of selling, but were on their guard at upper channel resistance, when the news hit. The Commerce Department reported that housing starts fell 5% in June, hitting the lowest level since last October. Building permits were up 2.1% for the month, but most of these gains were due to apartment permits in the Northeast. Although the indices sold off once again to retest premarket lows, the data didn't put a lot of additional strain on the market. Home builders ended up having a strong session with Pultegroup (PHM) rising 4.7% on the day and Ryland (RYL) higher by 3.4%.

Larger-than-average gaps in the overall market have a strong tendency to fill unless the gap also triggers a setup on the 60-minute time frame. Since I was already expecting greater day-to-day overlap in price action in the indices, however, it wasn't a big suprise that the market pulled up past the 5 minute highs to trigger the buy setup for the gap closure.

S&P 500

The indices established several waves of buying on the 5 minute time frame out of the open before stalling at approximately 11:15 ET. At at that point the market created its first correction intraday on the 15 minute time frame. A PhoenixTM buy setup took place out of 12:30 ET and the indices rallied strongly into the 14:00 ET correction period. Although this was a strong resistance level with the gaps closed and the ES hitting 15 minute 200 sma resistance, the momentum was stronger-than-average on the upside, making a sharp pullback unlikely. A trading range formed along the highs instead, creating a bull flag on the 15 minute time frame that broke to create a third leg higher intraday. This left the indices near exhaustion heading into the close, but the correction from that trend didn't come until after 16:30 ET. I am continuing to expect greater daily overlap in price action like we've seen over the past week as the month winds to a close.

Nasdaq Composite

The Dow Jones Industrial Average ($DJI) ended the session at 10,229.96 with a gain of 75.53 points, or 0.74%. 23 of the Dow's 30 index components posted a gain on Tuesday. The top performers were retailers Home Depot (HD) (+3.18%) and WalMart (WMT) (+2.75%), followed by the cyclicals. Caterpillar (CAT) rose 2.5%. IBM was the biggest loser, down 2.50% despite moving higher throughout the session. IBM posted earnings after the close on Monday and beat estimates, but its revenue fell short of forecasts. Drug makers and health care stocks also struggled. Johnson & Johnson (JNJ) fell 1.66%, while Pfizer (PFE) closed lower by 1.22%, and Merck (MRK) fell 0.39%. JNJ had reported an increase in earnings with flat revenue, but reduced its forecast for the year. The telecoms also lost on the day with AT&T (T) down 0.36% and Verizon (VZ) down 0.19%.

The S&P 500 ($SPX) rose 12.23 points, or 1.14%, and closed at 1,083.48. The strongest sectors included materials, energy, and industrials. Harley Davidson (HOG) was the best performer thanks to earnings, up 13.64%, while JC Penney (JCP) rose 9.16%. Cliffs Natural Resources (CLF) rose 8.19% and Autonation (AN) rose 7.93%. Zions Bancorp. (ZION) was the worst performer in the S&P 500, falling 8.92%, while Marshall & Ilsley (MI) fell 7.91%. Radioshack (RSH) closed lower by 6.57%, and Texas Instruments (TXN) was down 3.05% after it also posted revenue that was weaker-than-expected.

The Nasdaq Composite ($COMPX) ended the session higher by 24.26 points, or 1.10%, and it closed at 2,222.49. Sears Holdings (SHLD) was the strongest performer in the Nasdaq-100. It closed higher by 4.53%. Urban Outfitters (URBN) posted a gain of 4.44%, while Autodesk (ADSK) (+4.23%) and Wynn Resorts (WYNN) (+4.05%) also posted gains over 4%. Flextronics (FLEX) fell 4.71%, while Hologic (HOLX) fell 2.88%, and Marvell Technology (MRVL) shed 1.52%.

Coca-Cola (KO) and Morgan Stanley (MS) post earningson Wednesday, Microsoft (MSFT); Caterpillar (CAT) and 3M (MMM) on Thursday; and McDonalds (MCD) and Ford (F) on Friday.

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.

About the Author
Toni Hansen

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.

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