Good day! After experiencing the strongest monthly gain in a year, the market kicked off August with a bang. The indices were up sharply into the opening bell after moving higher on strong earnings in financials in Europe, but the indices were cheered even more by the 10:00 a.m. ET data in the U.S. Although the Institute for Supply Management reported that its gauge on manufacturing fell from 56.2 in June to 55.5 in July, this was better than the 54 level that analysts were anticipating. A reading over 50 shows expansion. An earlier report out of Europe showed that growth in that zone had actually accelerated in July. Meanwhile, construction spending in the U.S. rose 0.1% in June. Economists had been anticipating a decline of 0.5%.
Dow Jones Industrial Average
After cooling off following the opening bell, the market jumped on the 10:00 a.m. ET data. It was not able to maintain that enthusiasm though. Volume soon waned and the pace of the rally quickly fizzled. August is typically a light month for the markets, even during earnings season. It is traditionally a vacation month and I'll be gone for the second half of it myself. We should continue to expect lighter volume until after Labor Day, but the intraday action on Monday was not as typical, despite the light volume.
Once the morning news settled in, the market had a tough time developing any strong setup on the 5-15 minute time frames throughout the remainder of the session. The 5 minute 20 sma was support into 11:30 ET, and the market did react to this support level, but rounded highs ahead of the pullback made it more difficult to break to the upside and the attempt quickly failed. Although the indices pushed to new highs in the afternoon, the action was not impressive. Most of the session was spent with the indices chopping back and forth with only a slight upside bias in the second half of the day.
The Dow Jones Industrial Average ($DJI) posted a gain of 208.44 points, or 1.99%, and closed at 10,674.38 on Monday. All 30 of the Dow's index components posted a gain on the day. The top performers were Alcoa (AA) (+4.83%), Exxon Mobil (XOM) (+3.79%), JP Morgan (JPM) (+3.38%), and Hewlett-Packard (HPQ) (+3.30%). WalMart (WMT) was the weakest, but still posted a gain of 0.43%.
The S&P 500 ($SPX) rose 24.26 points, or 2.20%, and closed at 1,125.86. Office Depot (ODP) was the strongest stock in the index, rallying 10.42% after it reported a narrow-than-expected second-quarter loss. It was followed by gains over 7% in Anadarko Petroleum (APC), Goodyear Tire (GT), Peabody Energy (BTU), and Cliffs Natural Res. (CLF). Many of the top leaders were moving in conjunction with crude oil, which topped $81 a barrel on Monday. Mastercard (MA) was the weakest S&P 500 index component, falling 3.58% ahead of earnings on Tuesday, followed by Akamai Tech. (AKAM) (-3.02%), and Smucker JM Co. (SJM) (-2.80%).
The Nasdaq Composite ($COMPX) ended the session up 40.66 points, or 1.80%, on Monday and it closed at 2,295.36. The top performers in the Nasdaq-100 were Nii Holdings (NIHD) (+6.86%), Foster Wheeler (FWLT) (+4.91%), News Corp. (NWSA), and Life Technologies (LIFE) (+4.21%). Its biggest loser was Research in Motion (RIMM). RIMM's losses came after speculation that the United Arab Emirates might follow through on its threat to suspend Blackberry e-mail services in October due to the Blackberry's encryption software that the UAE has cited as posing security concerns.
The news on Monday created a stronger overall session than I'd anticipated heading into the weekend since it prevented the indices from strongly testing 20 day moving average support in the S&P 500 and Dow, although it did hit in the Nasdaq. I was hoping for one more day of corrective action off last week's highs to allow for a strong multi-day continuation on the upside. This would have put the correction from last week on par with the one off July 13th-14th highs on a daily and 60 minute time frame. When this happens, it lessens the risk of a false breakout and makes a move comparable to the prior rally very likely. Earlier breakouts not only fail more often, but tend to offer smaller rewards as well. This is not always the case, but the Dow hit 100 day sma resistance on Monday, and its failure to correct into the 20 day sma before breaking higher will make it more difficult to clear that resistance level. The deciding factor, however, will be news.
Earnings and the latest employment data will be providing a strong intraday influence for the indices this week. Some of the things to watch for on Tuesday will be July's personal spending data, and earnings reports from consumers such as MasterCard (MA) and Procter & Gamble (PG), as well as Pfizer (PFE) and Anadarko Petroleum (APC).
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.