Note: This will be my last column for a couple of weeks as I will be gone through Labor Day weekend. I am getting married out of state and will be on honeymoon until then. May the markets treat you well and I'll be back soon!
Good day! Despite a slight increase in volume mid-week, it dropped off again on Friday as the indices reacted to the latest daily support level. The market had broken lower out of a rising wedge by Wednesday, but several days of strong downside left the indices exhausted and in favor of a reprieve from the selling pressure. This can come in two forms following a sharper-than-average selloff: a period of congestion or a gradual retracement in price. Typically the result is a combination of both to a degree, but on Friday it was primarily accomplished through a period of congestion intraday.
The all-sessions time frame painted a slightly different picture. The index futures began to creep higher afterhours on Thursday. This continued into the 2:00 a.m. ET correction period, but in the end the bears were able to regain control, turning the indices lower ahead of the opening bell. The strongest selling took place between 5:00 and 6:15 a.m. ET. The market made slightly lower lows into 8:30 a.m. ET, but the day's economic data provided a boost that allowed the market to quickly recover the premarket losses.
Dow Jones Industrial Average
The Labor Department reported that consumer prices rose 0.3% in July. Core consumer prices were up 0.1%, which excludes the volatile food and energy components. Meanwhile, July retail sales were up 0.4% in July, which was lower than the 0.5% increase analysts were anticipating. Excluding autos, July retail sales were up 0.2%, which was in line with expectations. Although the overall reaction to the 8:30 a.m. data was positive, retailers felt the blow and were amongst the strongest decliners in the S&P 500 on Friday.
After turning to the upside following the premarket data, the market continued to push higher into 10:05 a.m. ET. The final push was a reaction to the latest consumer sentiment data. At 9:55 a.m. the University of Michigan reported that its gauge on consumer sentiment improved to 69.6, although this fell slightly shy of the 70 reading that was anticipated. In July the reading was 67.80. The 10:00 a.m. ET business inventories came in at a gain of 0.3% for June, which was higher than the 0.2% anticipated. Additionally, May's growth was revised higher to show an advance of 0.2% instead of the anticipated 0.1%.
In Friday's column I urged caution on buy setups, which were expected to be merely of daytrade potential. This 30 minute 20 zone held as the market corrected throughout the second half of the morning. A large portion of the day was spent bouncing back and forth in smaller 2 minute trends. Most of these trend moves lasted for the traditional 3 waves before the channel broke and reversed.
The first of these trends began in premarket trade coming out of the 8:30 a.m. ET economic data and established its third push higher with the 10:00 data. Three waves of correction followed as the market pulled back into 11:35 a.m. ET. The next set of three was the clearest in the Nasdaq and is shown on the 5 minute chart. This created the second wave of correction off lows on the 15 minute time frame. The 5 minute 200 sma served as resistance and the indices fell back to the zone of intraday lows into the weekend.
The Dow Jones Industrial Average ($DJI) posted a loss of 16.80 points, or 0.16%, and closed at 10,303.15 on Friday. About a third of the Dow's 30 index components posted a gain, while nearly 2/3 posted a loss. Three remained unchanged between Thursday and Friday's close. The top gainers were Bank of America (BAC) (+1.30%), Travelers (TRV) (+1.03%), Hewlett-Packard (HPQ) (+0.77%), and Caterpillar (CAT) (+0.76%).
Despite the gains, HPQ continued to negative attention in the press, although the reaction to the latest press was minor. According to the Wall Street Journal, the tech giant is under investigation by the Department of Justice on reports of bribery. HPQ was up with the rest of the market in the morning, but gave back a lot of the intraday gains to end the session unchanged from the open.
The weakest components were Intel (INTC) (-1.54%), DuPont (DD) (-1.10%), Home Depot (HD) (-1.09%), and American Express (AXP) (-1.00%). Overall, the Dow ended the week lower by 3.3%.
The S&P 500 ($SPX) fell 4.36 points, or 0.40%, and closed at 1,079.25. The strongest components of the S&P 500 on Friday were Nvidia (NVDA) (+4.80%), Ameren Corp. (AEE) (+3.22%), Cameron International Corp. (CAM) (+2.85%), Novell (NOVL) (+2.71%), and AutoDesk (ADSK) (+2.71%). Nordstrom (JWN) (-7.15%), Devry (DV) (-5.74%), Motorola (MOT) (-4.74%), JC Penney (JCP) (-4.71%), and Intercontinental Exchange (ICE) (-4.03%) were the weakest components. The S&P 500's weekly loss came in at -3.8%.
The Nasdaq Composite ($COMPX) ended the session lower by 16.79 points, or 0.77%, on Friday and it closed at 2,173.48. NVDA, ADSK, Seagate Tech. (STX) (+1.73%), and Netapp (NTAP) (+1.49%) were the top stocks in the Nasdaq-100. Apollo (APOL) (-3.78%), Garmin (GRMN) (-3.39%), Broadcom (BRCM) (-2.77%), and Urban Outfitters (URBN) (-2.25%) were the weakest. The Nasdaq Composite ($COMPX) ended the week lower by 5%.
Crude oil also had a big week this past week. It triggered the larger two-wave continuation pattern on the downside on the weekly time frame. We initially looked at this last month when it first began to form. This took place after hitting 20 week sma resistance after pulling up off July lows for approximately the same amount of time as the rally off the May lows to June highs.
The trading range that is forming in the markets has a bias favoring a break lower. It is still on the early side, however, since most of the market's recent corrective moves have lasted approximately four days. This means that there is still a good chance for the indices to base out for two more days before the breakdown triggers. The 30 minute 200 sma was support on the rally off July lows. It broke early last week, but will how serve as resistance. The strongest breakdown strategies will occur if the market manages to hold the trading range until that moving average catches up with the price action. If the breakdown takes place before that happens, then it can limit the potential and increase the chance of a bear trap. My target for a continuation breakdown is a return to the 10k zone in the Dow.
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.