Good day! The market hit the pause button on Monday, stalling at the 100 day moving averages in the S&P 500 and Nasdaq-100. Market participation dried up as the summer vacation season heated up and the entire week was afflicted by light volume and choppy intraday trade. Despite earnings season, the news everyone seemed to be waiting for was Friday's employment data.
The news was not good. Payroll employment fell 131,000, while the private sector added only 71,000 positions. The U.S. unemployment rate remained at 9.5%. Interest rates moved lower as the market plunged out of a narrow premarket trading range. On Friday the 10-year Treasury yield fell to 2.824%. Meanwhile, December gold settled higher by $6 at $1,205.30 an ounce. The FOMC meets on Tuesday to offer its most recent decision on its rates, but most are speculating that the Federal Reserve will continue to keep them steady for the remainder of the year.
Dow Jones Industrial Average
Interestingly, Friday's reaction to the latest employment report was very similar to what you will see following a federal rate announcement. The market reacted strongly immediately following the report, falling sharply lower on the disappointing news. A correction then took place into the open, pulling the indices higher into 10:00 a.m. ET. The second wave of reaction then followed, plunging the indices to new lows on the day. This three-wave reaction is one that traders see time and time again following major news. It was also the bearish action I wrote about Tuesday evening that the market was already technically setting itself up for before the news even hit.
From the technical standpoint, however, the bearish morning was not the only thing the market was biased towards. The congestion throughout the week and strong support at the lower channel from the July rally suggested that there was also still room to recover and push higher into the weekend. In order to accomplish this after such a sharp selloff, however, the indices needed to experience a shift in momentum intraday. This took place between 11:00 a.m. ET and 14:30 ET. During this time, the market pulled up off the morning lows, hit the 5 minute 20 period moving average, and fell into a trading range. Instead of pulling back to hug lows, however, the majority of the trading within the range fell in the upper 50% of the 11:00-12:00 ET push to the upside. As the range progressed, it tightened at the upper levels, finally breaking free out of 14:30 ET and confirming the breakout with an increase in intraday volume at 14:45 ET.
By the end of the trading day on Friday, all three of the market's major indices had recovered most of their earlier losses. The strongest recovery took place between 14:45 ET and 15:00 ET. The pace of the buying in that 15 minute time span nearly mimicked the pace of the earlier panic into 10:45 a.m. ET. The market congested again on a 2 minute time frame into 15:00 ET at the Nasdaq's 5 minute 200 sma resistance before pushing slowly higher in the final 30 minutes of trade. The Dow, S&Ps, and Nasdaq all ended the session near intraday highs.
The Dow Jones Industrial Average ($DJI) posted a loss of 21.42 points, or 0.20%, and closed at 10,653.56 on Friday. Kraft Foods (KFT) was the best-performer in the Dow, adding 2.36% after reporting better-than-expected profits, while McDonalds (MCD) followed with a gain of 1.83%. Microsoft (MSFT) recovered from early losses to post a gain of 0.71%, while Coca-Cola (KO) rose 0.67%. Top losers included JP Morgan (JPM) (-2.01%), Exxon Mobil (XOM) (-1.18%), and DuPont (DD) (-0.82%). Hewlett-Packard (HPQ) shares were sharply lower afterhours on Friday (-9.71%) following the shocking announcement that its Chief Executive Mark Hurd had resigned after becoming the focus of a sexual harassment probe that revealed falsified expense reports and other major concerns. Although trade was choppy, the Dow still managed a gain on the week of 1.8% thanks to Monday's strong open.
The S&P 500 ($SPX) fell 4.17 points, or 0.37%, and closed at 1,121.64. PerkinElmer Inc. (PKI) was the best performer in the S&P 500. It rose 11.17% after reporting that its quarterly income more than doubled and its outlook topped estimates. Massey Energy (MEE) followed with a gain of 5.24% .It began to recover from its selloff since early July, but Friday was one of its strongest sessions in months. MEE had turned sharply lower following a mining accident earlier in the year. Harmin Intl. (HAR) was the weakest performer in the S&P 500. It fell 11.60% following earnings. Hewlett-Packard (HPQ) followed with a loss off 9.71%, while Washington Post (WPO) fell 7.60%. HAR's founder announced on Monday that he will be purchasing Newsweek from WPO. The S&P 500 ended the week higher by 1.8% as well.
The Nasdaq Composite ($COMPX) ended the session lower by 4.59 points, or 0.20%, on Friday and it closed at 2,288.47. Foster Wheeler (FWLT) was the strongest stock in the Nasdaq-100, rising 3.91% on Friday. Warner Chilcott (WCRX) rose 3.33%, while Vodaphone (VOD) managed a gain of 3.00%, and Research In Motion (RIMM) added 2.34%. Activision Blizzard (ATVI) was the weakest stock in the Nasdaq-100. It ended the session lower by 6.47%. Autodesk (ADSK) (-5.05%) and Nii Holdings (NIHD) (-4.42%) were two other big losers. The Nasdaq Composite ended the week higher by 1.5%.
As we head into a new week of trade, the market is forming a rising wedge on the 60 minute time frame. While the trading range from last week suggests the potential for a slightly higher high early in the week, the larger pattern leads me to believe that such an attempt would be a bull trap, leading to a reversal and stronger selling than buying throughout most of the week. As a result, I will be using added caution on the long side and focusing on shorts in stocks showing strong relative weakness compared 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.