Market Spikes to four-Month Highs Ahead of Fed
Good day! Monday was a strong day for the markets. Premarket activity pulled the indices out of Friday's trading range, which was itself a breakout of a larger 30-minute congestion. This meant that the breakout on Monday confirmed the larger 30-minute setup and the short-term bias in favor of the bulls that I spoke about in yesterday's column. In fact, the action was so strong on this follow through that all three of the key indices closed at 4-month highs.
The next technical level of resistance to watch for is the upper trend line for the trading channel that has been in place during this time. This is quickly approaching and I've shown it on the chart below. We are already in that general zone of resistance. This is also the zone of May's mid-month pivot high that took place as the initial bounce following the flash drop at the beginning of that month. That high was 10,920 in the Dow.
Dow Jones Industrial Average
At 10:00 a.m. ET the buying really began to pick up steam on Monday. It was at this time that the National Association of Home Builders' Housing Market Index came out. This was the first of a series of housing-related data due out this week and it showed that builder confidence for single-family homes remained steady this month. The index was unchanged with a reading of 13. Even though this was less than the 14 economists were anticipating, it was reassuring to a market that had seen three straight months of downside in builder confidence. For today you will want to keep an eye on August's housing starts and building permits, while existing home sales will be reported on Thursday and new home sales data is due out on Friday.
News out of the National Bureau of Economic Research was also widely followed on Monday. It reported that the recession that has been ongoing for the past 18 months had officially ended in June 2009. Of course, the main focus since then has been whether or not we'll have what's been dubbed a "double-dip" recession. Even though homebuilder confidence stopped sliding for the moment, it's still an 18-month low and the housing market to far this summer has not given home owners a great deal to cheer about.
The market congested throughout mid-day on Monday, basing at intraday highs after the reaction at 10:00 slowed. The bias remained bullish, however, with light volume on the correction off morning highs and a slower momentum move as stocks pulled back into 12:30 ET. Smaller levels of congestion between 13:00-14:15 ET enhanced favor for an upside resolution to the trading range and the market climbed higher into the closing bell.
The Dow Jones Industrial Average ($DJI) posted a gain of 145.77 points, or 1.37%, and closed at 10,753.62 on Monday. Out of the Dow's 30 index components, only Cisco (CSCO) (-0.50%) posted a loss. The top performers were the financials. American Express (AXP) (+4.23%), JP Morgan (JPM) (+2.82%), Home Depot (HD) (+2.54%), and Bank of America (BAC) (+2.54%) were the strongest stocks.
The S&P 500 ($SPX) rose 17.72 points, or 1.52%, and closed at 1,142.71. Office Depot soared 10.20% on Monday, followed by an 8.22% gain in Lennar Corp., 7.48% gain in Teradata Corp. (TDC), and a 7.24% gain in Whirlpool (WHR). The biggest losers were International Paper Co. (IP) (-6.35%), Weyerhaeuser Co. (WY) (+2.32%), United States Steel (X) (-1.65%), and EOG Res. (EOG) (-1.55%).
The Nasdaq Composite ($COMPX) ended the session higher by 40.22 points, or 1.74%, on Monday and it closed at 2,355.83. Flextronics (FLEX) (+5.77%), Apollo (APOL) (+5.21%), Baidu (BIDU) (+4.83%) and Garmin (GRMN) (+4.18%) led the Nasdaq-100. Research In motion (RIMM) (-3.38%), Broadcom Corp. (BRCM) (-1.35%) were the worst performers.
Despite the short-term bullish bias, I've started keeping an eye out for stocks that are underperforming the overall market or have been slowing their ascent in recent days. As the Dow approaches upper channel resistance and the S&P 500 begins to resemble the July to mid-August rally, then we should see a larger weekly correction kick off.
Other than the housing data, the main event for the week on the economic front in the U.S. is today's FOMC meeting. Please note that there was a typo in yesterday's column in which the calendars showed the correct date, however, the column showed it as being on Wednesday. Most people are not anticipating any changes in the rate itself, so the wording of this afternoon's announcement is what traders will be focusing upon. Namely, what the outlook might be for future action. The morning should offer decent opportunities for daytraders, but always use more caution on a Fed day after late morning. This is when things start to slow down ahead of the 2:15 p.m. ET announcement. After that, watch for a series of three major moves. These consist of an initial reactionary move, a counter-move, and a third one back in the direction of initial favor. The counter-move can be greater than the initial move. This plays out on a 1-2 minute time frame and again on the 5 minute one.
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.