Good day! August kicked off with strong opening gap on Monday morning, but the the indices struck resistance early in the week at the S&P 500 and Nasdaq-100 100 day simple moving averages. They have yet to budge so far this week with volume waning as summer winds to a close. It is common to see volume dropping off in August, but the volume, combined with the resistance has created a sloppy week of trade. The indices have been swayed intraday by economic data and earnings, but there has not been a lasting intraday reaction to the data.
Dow Jones Industrial Average
Wednesday's economic data in the U.S. began with the premarket ADP employment change, which is often monitored as a guide for the Friday employment numbers. ADP, which processes payrolls, reported that private employers added more jobs in July than anticipated. The index futures shot higher in premarket trade on this report, but the biggest U.S. economic news to impact the market intraday on Wednesday was the Institute for Supply Management's non-manufacturing index.
The ADP data helped the indices gap higher into the opening bell, but the reaction to the ISM data took back those gains. According to the ISM, the services sector grew slightly more than anticipated in July. Its non-manufacturing index rose from 53.8 to 54.3 in July, while the employment component rose from 49.7 to 50.9. Readings over 50 indicate expansion. The data failed to impress market participants, however, and the morning gap quickly filled in all three of the major indices on a negative reaction to the news.
When following only the intraday data in a security, meaning the price action between the opening and closing bells, the level that a security trades at into the closing bell will serve as a major support or resistance zone in subsequent sessions. If a security gaps open the next day, the closure of the gap is one example of when that previous close can hold, resulting in a counter-move off that zone. These price levels are shown in dark green in the charts from today's column.
On Wednesday the opening gap was to the upside. The gap closure served as a support zone. This zone also hit with the 10:15 ET correction period, which is a typical time of the day for reversals to take place within a session. Due to the rapid momentum of the downside into this level, however, the upside that followed was choppy and volume was light. The momentum was also substantially more gradual. Even though it took a mere 15-20 minutes to close the gap following the ISM report, it took 2-2.5 hours to recover most of the losses and return to the zone of the day's highs. This zone served as a resistance level once again and the market pulled back to 15 minute 20 sma support. The initial move on the downside in afternoon, while weaker in momentum than in the morning, was still stronger-than-average. It once again led to a more gradual pull higher off support at 13:30 ET and the market trended steadily higher into the closing bell.
Although the impact on the overall market was mild, currency participants pounced on the ISM data and reacted to the news by breaking sharply higher or lower at 10:00 a.m. ET as the U.S. dollar shot higher.
The Dow Jones Industrial Average ($DJI) posted a gain of 44.05 points, or 0.41%, and closed at 10,680.43 on Wednesday. DuPont (DD) was the top gainer in the Dow, up 2.37%, while Disney (DIS) followed with a gain of 1.81%, and Pfizer (PFE) gained 1.73%. Microsoft (MSFT) was the worst performer. It fell 1.64%. Hewlett-Packard (HPQ) (-1.25%), and American Express (AXP) (-1.10%) also topped the losers list.
The S&P 500 ($SPX) rose 6.78 points, or 0.61%, and closed at 1,127.24. Priceline (PCLN) was the best performer in the S&P 500. It gapped sharply higher and posted a gain of 21.95% after sharply surpassing analysts' earnings estimates. Ralph Lauren (RL) followed at a distant second with a gain of 7.77%. Electronic Arts (ERTS) came in third, posting a gain of 7.42%. Pitney Bowes (PBI) was the worst performer in the S&P 500. It fell 15.87%, while Titanium Metals (TIE) fell 11.18%, and Whole Foods (WFMI) ended the session lower by 8.43%.
The Nasdaq Composite ($COMPX) ended the session higher by 20.05 points, or 0.88%, on Wednesday and it closed at 2,303.57. PCLN, ERTS, and Expedia (EXPE) (+6.39%) topped the Nasdaq-100. EXPE rose in sympathy with the PCLN earnings move. Nvidia (NVDA) (+4.25%) and Amazon.com (AMZN) (+4.22%) also posted strong gains. Research In Motion (RIMM) was the weakest stock in the Nasdaq-100. It fell 3.85%, while Express Scripts (ESRX) closed lower by 2.63%.
The remainder of the week holds several key data reports, such as employment numbers and even the European Central Bank's interest rate decision. Same-stores sales data from a number of major retailers will also be coming out on Thursday. This, along with a slew of earnings reports, will keep market participants busy into the weekend. Volume has been light so far this week, but I'm anticipating it to increase and for the market to break its 60 minute trading range on Thursday. I do not have a strong directional bias for that breakout and it will likely be led by news. The 5 minute time frame was bearish into Wednesday's close, but the larger 30-60 minute trading range suggested a bullish resolution. Typically I will give preference to the 30-60 minute time frames, but I tend to pass on setups that do not confirm the same bias on the smaller time frames and will instead trade the smaller time frame setups until the time frames fall into sync once again.
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.