Market Falls Into daily range
Good day! Volume has remained light coming out of the three-day, Labor Day weekend. On Tuesday the market turned lower off strong daily resistance levels with 100- and 200-day moving averages stalling the advance from the previous week. The pace of the buying was stronger-than-average into that resistance, however, creating favor for a more gradual correction, or even a trading range, as the market reacts on a daily time frame.
So far this slower correctional bias has prevailed. The indices bounced on Wednesday, pulling up to fall within Tuesday's trading range. The S&P 500 and Dow Jones Industrial Average played off intraday support and resistance, holding key levels going back to Friday. This included Tuesday's highs, Friday's close in the S&Ps, and Friday's open in the Dow... to name a few. The Nasdaq ended up outperforming the other two indices, but it slowed its advance into the 15 minute resistance zones as well.
Dow Jones Industrial Average
The morning was pretty sloppy for the market. The indices were trading higher into the open on further news out of Europe that appeared to downplay debt issues somewhat. The market continued to push higher throughout most of the morning, but the indices only made a series of slightly higher highs with decreasing momentum on the rally. This makes it difficult for daytraders that miss out on the initial upside since the greater degree of overlap from one bar to the next on the intraday charts and the slightly higher highs make it easier to get sucked into a setup only to see it quickly reverse. Even when timed correctly, the risk compared to the reward potential is very diminished since a rapid breakdown can quickly wipe out gains in a matter of seconds or minutes that took hours to accumulate.
The market attempted one correction out of the 11:15 ET correction period, but the pace remained gradual. The indices bounced again out of noon. The Nasdaq hit new highs, but the slower S&P and Dow found resistance at morning highs. The rally back into those highs took more time that the pullback off them. This shifted the bias in favor of another pull lower. This began at 13:00 ET and the selling continued into the Fed's Beige Book at 14:00 ET.
It's interesting that many sites have attributed the afternoon correction to the Beige Book when most of the afternoon's "losses" came before it hit the wires. When it did, it merely confirmed what market players were already expecting and the market participation, as shown by volume, did not increase substantially. The Beige Book is a glimpse at the Fed's view of the economy and it drove the point home that the economic recovery is bound to be a slow one. The market bounced soon after 14:00 ET, but fell back following a 2 minute Momentum Reversal in the final hour of trade.
The Dow Jones Industrial Average ($DJI) posted a gain of 46.32 points, or 0.45%, and closed at 10,387.01 on Wednesday. JP Morgan (JPM) was the strongest performer in the Dow, rising 2.19%. It was followed by Alcoa (AA) (+1.93%), Boeing (BA) (+1.70%), and General Electric (GE) (+1.68%). 5 of the Dow's 30 index components posted a loss. They included Hewlett-Packard (HPQ) (-2.78%), Intel (INTC) (-1.21%), Microsoft (MSFT) (-0.13%), WalMart (WMT) (-0.06%), American Express (AXP) (-0.05%).
The S&P 500 ($SPX) rose 7.03 points, or 0.64%, and closed at 1,098.87. New York Times Co. (NYT) was the best performer in the S&P 500. It was up 7.99% following rumors that Carlos Slim (now the world's richest man) may be increasing his stake in the company. Priceline (PCLN) was another leader, hitting new 52-week highs once again with a gain of 5.53% on Wednesday. Visa (V) was the weakest component of the index, down 4.13% on the day. In the same sector, Mastercard was the fourth largest decliner, falling 3.05%.
The Nasdaq Composite ($COMPX) ended the session higher by 19.98 points, or 0.9%, on Wednesday and it closed at 2,228.87. Joy Global (JOYG) was the second-best performer in the Nasdaq-100, rising 5.37%. PCLN was the best. eBay (EBAY) was third with a gain of 4.42%. Just over a dozen of the 100 stocks posted a loss. Only Applied Materials (AMAT) (-2.22%), Virgin Media (VMED) (-1.69%), and Intel (INTC) (-1.21%) posted losses over 1%.
My daily outlook for the market remains the same as heading into Wednesday: "As the week wears on, we should see a continuation of the reaction to the daily resistance, but the market is favoring a more gradual correction off last week's highs than the momentum into them. The door is even open for a trading range to result in a break higher for a two-wave bounce on the daily charts off August's lows with the first bounce having taken place into last week's highs. This is currently the most likely technical outcome, whereby a second, slower upside wave on the daily time frame would then be followed by further selling into the end of the month and early October."
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.