Good day! Although the ADP report on Wednesday showed an increase of 42,000 private sector jobs last month, Thursday's employment data was not as promising. The Labor Department reported an unexpected jump in those filing for first-time unemployment benefits. Analysts were looking for a 2,000 drop. Instead, benefits rose by19,000 to 479,000 last week. This is the highest they have been since the first half of April. The employment data continues into Friday morning with July's non-farm payrolls data. Analysts are expecting a loss of 65,000 jobs, primarily in government. The private sector is expected to show a gain, adding 90,000 jobs.
Dow Jones Industrial Average
The market did not welcome Thursday's news, but the reaction was brief. The index futures were already forming a bearish bias into Thursday morning and the unemployment report merely served as the catalyst for the breakdown. The selling was rapid to begin with, but the pace slowed into the opening bell. This created a momentum shift that allowed the indices to pull higher out of the open to begin to close the gap early in the session. The selloff into the open had also struck strong support levels from the lower end of the 60 minute trading range. Indicator support played a role as well. The Nasdaq-100 eMinis were trading at their 5 minute 200 moving average into the open.
Volume has been particularly light so far this month, and Thursday was not an exception. This has created sloppy intraday action in the overall market, offering fewer setups with strong reward versus risk opportunities in the indices. I found Thursday to be a difficult day to trade. Despite a strong list of securities as trade candidates in the morning, nearly everything that triggered remained stuck in a trading range throughout the session. Although this is certainly better than triggering a setup and reversing sharply, tightly congested trading ranges and light volume that holds into the closing bell is not the type of action daytraders wish to see!
There were a number of stocks that did manage stronger directional moves as the day wore on. the majority, however, did not show up in early scans for relative strength or weakness because they were trading in narrow ranges near Thursday's close and did not develop strong relative momentum until after they triggered breakouts. These types of opportunities are difficult to locate without a great deal of manual scanning. This is something I will do to at least some degree every day once I make it through my initial scans. I typically begin with the Nasdaq-100 and S&P 100 and then expand my search as time allows.
In addition to the jobs data this week, eyes have also been focused on the retailers. July's retail sales were not very promising. Many stores fell short of analyst expectations, while large discounts and promotions were credited for those that showed some improvement. One of the strongest retailers on Thursday was Target (TGT), which rose 2.64%, while JC Penney (JCP) was one of the weakest and fell 7.68%.
The Dow Jones Industrial Average ($DJI) posted a loss of 5.45 points, or 0.05%, and closed at 10,674.98 on Thursday. Just over half of the Dow's 30 index components posted a loss. The weakest were American Express (AXP) (-2.02%), Pfizer (PFE) (-1.52%), Microsoft (MSFT) (-1.40%), and Bank of America (BAC) (-1.20%). Caterpillar (CAT) was the only Dow component to post a gain over 1%. It led the Dow with a move of +1.18%. United Tech. (UTX) followed with a gain of 0.73%, while Alcoa (AA) rose 0.52%.
The S&P 500 ($SPX) fell 1.43 points, or 0.13%, and closed at 1,125.81. The S&P 500's leaders were Metro PCS (PCS) (+7.51%), Archer Daniels Midland (ADM) (+5.73%), Cigna (CI) (+5.63%), and Kohls (KSS) (+4.06%). JC Penny (JCP) (-7.68%), Big Lots (BIG) (-6.59%), and Hartford Financial Services (HIG) (-4.87%) were the biggest losers.
The Nasdaq Composite ($COMPX) ended the session lower by 10.51 points, or 0.46%, on Thursday and it closed at 2,293.06. Priceline (PCLN) (+4.04%), News Corp. (NWSA) (+3.61%), Garmin (GRMN) (+3.34%), and Warner Chilcott (WCRX) (+3.16%) were the best performers in the Nasdaq-100. Foster Wheeler (FWLT) (-4.53%), Ross Stores (ROST) (-4.33%), and Apollo Group (APOL) (-4.31%) were the weakest.
The Labor Department will be releasing its July non-farm payrolls report at 8:30 a.m. ET on Friday. Economists are expecting loss of 87,000 jobs with a move in the unemployment rate from 9.5% to 9.6%. The technical bias for the market has not changed since Thursday. The intraday action suggests a bearish move into Friday morning, but the 60 minute charts are still showing a strong base at summer highs. It is very obvious that many participants are on the fence about Friday's data and are unwilling to place large bets ahead of the news. This applies to myself as well. I am favoring upside into the weekend, but the slower momentum of the buying on the 15 minute time frame in the indices on Thursday will add risk and it will be better to begin by focusing on the 2-5 minute time frames to build positions until the 60-minute range breaks. There is a strong chance of that range breaking on Friday since this is approximately how long the previous correction took at the end of July.
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.