Good day! The market was favoring weakness heading into Monday's closing bell after a week of light volume and indecisive trade. During this time, the indices were establishing a third high within a larger rising wedge formation on the daily time frame that began when the indices pivoted off lows into the beginning of July.
The index futures turned lower afterhours on Monday and continued to trend lower throughout afterhours trade on Monday and premarket trade on Tuesday morning. The pace of the selling accelerated after 8:00 a.m. ET, continuing to push rapidly lower following the opening bell. This left the indices extended on the downside by 9:45 a.m. ET.
Before the open on Tuesday morning, the Labor Department reported that non-farm productivity fell 0.9% in the second quarter. Analysts were anticipating a tick higher by 0.1%. Meanwhile, unit labor costs pushed higher by 0.2% in Q2. Growth of 1.4% had been expected. This disappointment helped fuel the selling.
Dow Jones Industrial Average
The market held lows early on Tuesday morning. By 10:00 a.m. ET the indices were already pulling higher. At 10:00 ET the Department of Commerce reported that wholesale inventories rose 0.1% in June. +0.4% had been expected. Volume dropped following this report, however, and the market did not make a great deal of progress on the corrective move in terms of price action. Nevertheless, the morning moves on the 5 minute time frame were smooth and held technical triggers extremely well, making it an easy morning for daytraders.
The pull higher off the morning lows stalled into 10:30 a.m. ET, but was followed by a clear-cut Phoenix (TM) that formed as the indices congested on a 2-5 minute time frame into 11:00 a.m. ET. This buy setup triggered out of the 11:00 ET correction period, leading to a second reactionary move off the morning lows on the 5 minute time frame.
Two wave of correction are typical before a trend attempts to resume. This made the 12:00 ET correction period a strong one since the indices were hitting equal move resistance on the 5 minute time frame on the second wave of upside as compared to the first at that time. In other words, the 9:45-10:30 ET rally was mimicked on the breakout from 11:00 to 11:45 ET, leaving the indices in favor of a break in the buying going into the early afternoon. The indices rounded off at highs and turned lower into 12:30 ET. Then they began to congest, trading in a gradually ascending channel on the 2 minute time frame from 13:30 ET into the 14:15 ET Federal Reserve interest rate announcement.
The price bias in the indices in the hour before the Fed announcement remained bearish. The indices were reacting slowly to the support and the 15 minute 20 sma loomed overhead. There is a very good reason I never hold an intraday position into the Fed news, however, and Tuesday drove that rule home. Although the Fed left rates unchanged as expected, they offered the market relief by announcing that they would "keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities". They will also roll over Treasury holding as they reach maturity.
The market reacted favorably to the Fed announcement... at least initially. The indices popped, stalled, and then continued higher into 14:45 ET. Once these initial three waves of reaction on the two minute time frame were established, however, the market had a harder time holding onto the gain. The second move on the larger 5-10 minute charts was a correction between 14:45 ET and nearly 15:30 ET when the market pulled back into 20 and 200 period moving average support. This support held into the close, basing until finally giving way to selling once again into 20:00 ET. The afterhours move took the index futures back to the zone of intraday lows by 21:00 ET.
This leaves the larger daily bearish bias still in place going into Wednesday. The Nasdaq is forming a particularly nice pattern for continued weakness as the week wears on. As I've stated already this week, continue to use added caution on the long side. Most of the setups you will likely come across in that direction will be scalps and daytrades and will go against the larger bearish bias for the markets.
The Dow Jones Industrial Average ($DJI) posted a loss of 54.50 points, or 0.51%, and closed at 10,644.25 on Tuesday. Despite the afternoon recovery, only 9 of the Dow's 30 index components posted a gain. The top performers were Merck (MRK) (+1.16%), Pfizer (PFE) (+0.91%), American Express (AXP) (+0.78%), and Procter & Gamble (PG) (+0.66%). Intel (INTC) (-4.02%), Alcoa (AA) (-2.66%), Travelers (TRV) (-2.39%), and Microsoft (MSFT) (-2.11%) were the top decliners.
The S&P 500 ($SPX) fell 6.73 points, or 0.60%, and closed at 1,121.06. Akamai Technologies (AKAM) (+4.86%), XL Group (XL) (+2.68%), Colgate Palmolive (CL) (+2.23%), Lilly Eli & Co. (LLY) (+2.19%), and Baxter Intl. (BAX) (+2.14%) were the top gainers in the S&P 500. Advanced Micro Devices (AMD) (-7.95%), Western Digital (WDC) (-6.12%), and MetroPCS Communications (PCS) (-5.90%) were the weakest stocks in the S&P 500.
The Nasdaq Composite ($COMPX) ended the session lower by 28.52 points, or 1.24%, on Tuesday and it closed at 2,277.17. Teva Pharmaceuticals (TEVA) (+1.41%) was the top gainer in the Nasdaq-100. It traded higher on news that it completed the acquisition of ratiopharm, which is Germany's second-largest generics producer. This will make TEVA Europe's number one generic company. Henry Schein (HSIC) (+1.24%), Celgene Corp. (CELG) (+1.23%), DirecTV (DTV) (+1.18%), and Research In Motion (RIMM) (+1.12%) also topped the the Nasdaq-100. Seagate Tech. (STX) (-6.49%) was the biggest loser, trading lower after Barclays Capital downgraded it from overweight to equal weight. Lam Research (LRCX) (-5.75%), Flextronics Intl. (FLEX) (-5.34%), and Qiagen (QGEN) (-4.81%) were followed as top losers.
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.