Good day! The market ended Friday's session flat compared to Thursday's close, giving us the strongest month in a year as July wound to a close. The market had a tough time heading into the opening bell though. Thursday's close left the bias strongly in favor of the bears going into Friday. The outcome was a sharp gap lower into the opening bell when the technical bias received a boost from disappointing economic data.
Dow Jones Industrial Average
The gross domestic product rose 2.4% according to the government's preliminary estimate, but this was lower than expected. The gap lower in the indices, however, was larger-than-average. Typically, these have a stronger chance of closing than the minor gaps in the overall market. The trigger I typically use for such gaps is a break in the 5 or 15 minute highs, depending upon how the momentum forms in the initial 5 minutes of the day. A minor rally to the upside followed by a small base in the initial 5 minutes will mean that I will take a break in the 5 minute highs. If the initial 5 minutes is weaker on a gap lower, however, I'll wait the full 15 minutes to see if the momentum shifts instead of taking a setup above 5 minute highs. Smaller Phoenix(TM) setups can be used as well.
On Friday, the market remained weak in the initial 5 minutes, making it necessary to wait for that 15 minute mark to pass before looking for setups in favor of the gap closure. On Friday it did not cause a false stop by triggering a 5 minute break and then flushing lower before moving higher once again, but this is not uncommon. Waiting a little longer diminishes that risk.
Once the gap strategy triggered (which is detailed further in my Mastering Momentum Gaps course), the indices pushed quickly into their 5 minute 20 sma resistance levels before easily continuing to new intraday highs and full gap closure by 11:00 a.m. ET. The indices struggled at that point. A two-wave correction formed at intraday highs on a 15 minute time frame, pulling the market back with strong daytrade moves of resistance and into the 14:00 ET correction period. The uptrend resumed at that point and the market continued to have solid 5 minute price swings into the closing bell.
The Dow Jones Industrial Average ($DJI) fell 1.22 points, or 0.01%, and closed at 10,465.94 on Friday. Half of the Dow's 30 index components posted a gain. The leaders included Home Depot (HD) (+1.64%), Boeing (BA) (+1.37%), Alcoa (AA) (+1.36%), and Verizon (VZ) (+0.62%). The top losers were Intel (INTC) (-2.04%), Merck (MRK) (-1.71%), Exxon Mobil (XOM) (-1.09%), and 3M (MMM) (-0.93%). The Dow ended the week higher by 0.4%, while it ended the month higher by 7.08%.
The S&P 500 ($SPX) rose 0.07 point, or 0.01%, and closed at 1,101.60.The index's strongest sectors were the consumer discretionary, materials, and health care stocks on Friday. The leading individual performers were McAfee (MFE) (+9.42%), Expedia (EXPE) (+7.64%), Coventry Healthcare (CVH) (+5.20%), and Eastman Chem. (EMN) (+4.82%). The weakest sectors for the day were the utilities, techs, and energy stocks. MEMC Electr. Matls. (WFR) was the biggest loser (-15.10%), followed by Genworth Finl. (GNW) (-14.0%), First Solar (FSLR) (-7.42%), and Micron Tech. (MU) (-6.43%). The S&P 500 ended the week lower by 0.1%, but was up 6.88% for the month of July. The month's best performers were the materials, while health care lagged the others.
The Nasdaq Composite ($COMPX) ended the session up 3.01 points, or 0.13%, on Friday and it closed at 2,254.70. EXPE was the top performer in Nasdaq-100, followed by Warner Chilcott (WCRX) (+4.96%), TEVA Pharm. (TEVA) (+3.56%), and Dentsply Inc. (XRAY) (+3.37%). FSLR was the worst performer. Citrix Sys. (CTXS) (-2.91%) and Maxim Integrated (MXIM) also topped the loser list. The Nasdaq Composite ended last week lower by 0.65%, but rose 6.9% for the month.
The Reuters and University of Michigan's consumer sentiment index helped with the recovery efforts intraday on Friday. The index came in at a better-than-expected 67.8 for July. Nevertheless, it is still the lowest reading in 9 months. Manufacturing in the Chicago-area, however, also showed better-than-expected readings.
In Friday's column I wrote about the 20 day moving average serving as a level of major daily support in the indices. Friday's bounce out of the open kept the indices from pushing into this level, but it still remains a strong level that the market will likely be drawn to this week. Despite the gap closure, the overall bias based upon 15 minute momentum action is still in favor of further corrective activity off highs. So far this correction has played out with greater day-to-day overlap as anticipated, but the risk has opened for an increase in downside momentum this week. The indices will be easily swayed by earnings announcements, so continue to use greater caution on swingtrades that trader in close harmony to the overall market.
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.