Note: The current futures contract for the indices is December: Z01. Sept. charts are being used in some cases to show continuity.
Good day! The new trading week kicked off on a positive note following news abroad. One of the events to make headlines was the meeting that resulted in the new Basel III banking capital rules that will require financial institutions to increase their common equity from 2% to 4.5%. Common equity refers to a relationship that involves the number of common shares in possession of shareholders and shares currently available on the market. The increase will give institutions a larger cushion in times of crisis to withstand downturns, but the requirements will be phased in over the next 9 years with the full brunt of the rules not coming into force until 2019. This longer time line was more than many had anticipated. The result upon banking shares was overwhelmingly positive. The KBW Bank Index close higher by 3% on Monday. It is up 11% from its low of the year, which was set only two weeks ago.
Dow Jones Industrial Average
In other news from the weekend, the European Commission reported that it changed its stance on this year's eurozone gross domestic product (GDP). It had been anticipating a growth of 0.9% in 2010, but now it raised its target to 1.7%. The euro rallied sharply against the greenback. Economic data was also favorable in China. The country reported that it's industrial production for August grew 13.9% year-over-year, while its retail sales were up 18.2% year-over-year. The U.S. retail sales data for August is due out at 8:30 a.m. ET and will be one of the week's most closely watched economic report.
The data and news that took place ahead of Monday's open helped the bullish bias I wrote about in yesterday's column play out on the 60 minute time frame. The pace of the buying slowed, however, when the index futures held resistance early in the morning and fell into a widening triangle formation in the S&P 500 that continued to develop throughout the day. A higher high was hit at the 10:45 ET correction period and held. Three waves of correction on a 2 minute time frame followed, leading to a lower low mid-day, but the indices were able to turn and creep back into highs to hit a slightly higher high at the end of the day. The Nasdaq had rallied more quickly out of the open, so while the S&Ps were forming a widening triangle, the NQ hit a slightly higher high to form a 2T reversal going into the closing bell. The reaction took place afterhours with the overall market pulling lower into the evening.
The Dow Jones Industrial Average ($DJI) posted a gain of 81.36 points, or 0.78%, and closed at 10,544.13 on Monday. 24 of the Dow's 30 index components posted a gain on the day. The top performers were Microsoft (MSFT) (+5.28%), JP Morgan (JPM) (+3.42%), Intel (INTC) (+3.28%), Alcoa (AA) (+3.13%), and Cisco (CSCO) (+3.10%). The top losers were McDonalds (MCD) (-0.59%) and Exxon Mobil (XOM) (-0.33%).
The S&P 500 ($SPX) rose 12.35 points, or 1.11%, and closed at 1,121.90. The top gainers in the S&P 500 on Monday were Micron Technology (MU) (+8.29%), Xerox Corp. (XRX) (+7.68%), Zions Bancorporation (ZION) (+7.41%), Advanced Micro Devices (AMD) (+6.37%). The top losers were Laboratory Corp. (LH) (-4.70%), Visa (V) (-3.83%), Quanta Svcs. (PWR) (-2.74%), Range Res. (RRC) (-2.59%), and Mastercard (MA) (-2.58%).
The Nasdaq Composite ($COMPX) ended the session higher by 43.23 points, or 1.93%, on Monday and it closed at 2,285.71. The best performers in the Nasdaq-100 were Garmin (GRMN) (+6.97%), Nvidia (NVDA) (+5.66%), Microsoft (MSFT) (+5.28%), and Sandisk (SNDK) (+5.01%). 8 of the Nasdaq-100's components posted a loss. Celgene Corp. (CELG) (-1.46%) and Illumina (ILMN) (-1.11%) were the only two that fell more than 1%.
The market is at a pivotal point on the 60 minute charts. If they hold the upper channel level from last week on this time frame, then we can see the market turn sharply lower by the end of the week on a Momentum Reversal. On the other hand, the more favorable setup developing is in line with my bias heading into the weekend. This favors a break higher out of the channel to confirm a second wave of buying whereby the slower pace of the past week represents a correction taking place through a momentum slowdown. This break would mean that the indices have another run in them that could equal the move from the first week of September.
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.