Market Pushes Higher on Strong Data, but Struggles to Maintain Gains
Good day! The index futures shot higher on Thursday morning in reaction to the premarket economic data that was released at 8:30 a.m. ET. Initial jobless claims were lower than expected for last week. They came in at a total of 451,000, which was 19,000 less than anticipated and down 27,000 week-over-week. Continuing claims were 4.48 million. Additionally, the U.S. trade deficit narrowed unexpectedly in July from $49.8 billion to $42.8 billion. The data had been expected to come in at $47.3 billion.
Dow Jones Industrial Average
The positive reaction to the data led to a large upside gap in the indexes, but it also left it overextended on the short-term time frames. The index futures had established two waves of buying prior to the market open. The first was in the early-morning hours, while the second came on the heels of the morning data. This set of two mimicked the upside action from the prior morning, breaking the indices out of a longer congestion that began Wednesday morning. As a result, it completed the trend move for the breakout with the second wave of upside into the opening bell and left the market extended into the start of the regular trading session.
Since the premarket buying was stronger-than-average, it made a more gradual correction likely. The indices pulled back slowly off the premarket highs and found initial support at the 5 minute 20 period simple moving average zone. This also corresponded to the 10:45 ET correction period. On the 15 minute time frame, however, this was not enough of a correction given the extent of the premarket rally to allow for a strong upside continuation. The result was another period of congestion. The indices formed a 5 minute Avalanche within that congestion from around noon into 12:30 ET and broke sharply lower out of that formation into the early afternoon. This breakdown closed most of the morning gap and the pace slowed between 13:00-14:30 ET to allow the market to pull higher once again off support at 14:30 ET. The most was not enough to return the indices to the zone of the day's highs, but they managed to eek out small gains for the session.
The Dow Jones Industrial Average ($DJI) posted a gain of 28.23 points, or 0.27%, and closed at 10,415.24 on Thursday. 23 of the Dow's 30 index components posted a gain. They were led by JP Morgan (JPM) (+2.51%), Johnson & Johnson (JNJ) (+1.65%), American Express (AXP) (+1.55%), and AT&T (T) (+1.53%). McDonalds (MCD) (-2.25%), Boeing (BA) (-1.64%), and DuPont (DD) (-0.50%) were the Dow's biggest losers.
The S&P 500 ($SPX) rose 5.31 points, or 0.48%, and closed at 1,104.18. Adobe (ADBE) was the S&P 500's top gainer (+12.11%) after Apple (AAPL) announced that it would be relaxing its rules for app developers. JDS Uniphase (JDSU) (+5.71%), Tenet Healthcare (THC) (+5.49%), and Moodys (MCO) (4.02%) were the other top performers. The weakest were Dr Pepper Snapple Group (DPS) (-6.66%), Harman Intl. (HAR) (-3.81%), and Titanium Metals (TIE) (-2.90%).
The Nasdaq Composite ($COMPX) ended the session higher by 7.33 points, or 0.33%, on Thursday and it closed at 2,236.20. Warner Chilcott (WCRX) followed ADBE for the gainers in the Nasdaq-100 (+4.09%) after announcing dividends. Virgin Media (VMED) came in third with a gain of 2.44%. Altera (ALTR) (-2.81%) was the biggest loser in the index, followed by Cognizant Technology Solutions (CTSH) (-2.40%), and Priceline (PCLN) (-1.51%).
Thursday's trading meant that the market continued to push higher following last week's strong gains, but the overall momentum of that buying has diminished sharply. In reality, this week has been one of corrective activity whereby Friday's morning highs into daily resistance stalled the rally and shifted the momentum. Although it has not been the trading range I was anticipating, it is very closely related. It does have a more negative undertone though.
If the indices stalled at the resistance, based, and then broke higher, we could have seen a larger market continuation form on the upside with a slower correction. Since the pace slowed even as the market breaks out of the range, it increases the risk for a more rapid flush lower once the slower trend channel from this week gives way. You can see similar action on a 60 minute chart of the indices whereby the rally at the beginning of July slowed with slightly higher subsequent highs into early August. The result was a stronger break lower into the second week of August.
So far the shift in momentum is not as strong as that one, but it's something to keep an eye on. The most favorable trading in the current environment is on the short-term, intraday time frames. Multi-day holds will have a more difficult time establishing strong follow-through.
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.