Good day! When I was writing this column for Friday, the market was not feeling particularly spunky. The indices had sold off sharply on Thursday heading into the closing bell despite an intraday recovery and the afterhours activity was keeping prices congested at the closing lows. Having established an inverse "V" reversal off highs mid-day, following a similar style of reversal off premarket lows, the predominant pattern was a continuation pattern forming with favor for another breakdown into the weekend. This was still a bit early for a larger weekly reversal, so my initial objective was small and I expected it to be followed by another test of the upper daily channel in the Dow (Figure 1) before a larger weekly correction going into October. Thanks to a shift in the pace action within the afterhours and premarket congestion, followed by stronger-than-expected premarket data, the market had other plans.
Dow Jones Industrial Average (Figure 1)
Things began to look more favorable for the bulls after 6:00 a.m. ET. At that point, a strong drop off the upper end of the early-morning trading channel was still in favor of the bears. In order to confirm that favor, however, the index futures needed to hug the lower end of the trading channel after 6 and then confirm with a channel break to the downside. It was reaching the critical point in terms of time development for a breakdown, but at 7:00 a.m. ET the momentum shifted again. The index futures popped to the upper end of the channel and began to base along that resistance. As those of you who have followed this column for awhile know: When this happens, the directional bias for a breakout from the trading channel shifts in favor of the bulls. Even before the morning's economic data hit the wires, the market began to break higher. An initial bull trigger took place out of 8:00 a.m. ET. The morning data, however, gave it a huge kick.
Although the data was not exceptional, it was enough to offer hope and waylay some of the fears of the economy experiencing a "double-dip" recession. August's durable goods orders came in at -1.3% compared to the -1.0% analysts were looking for, but the core number, which excludes the more volatile aircraft and car component, was actually up 2.0% compared the the 1.0% forecast. The improvement suggests that consumers are still hesitant to shell out the big bucks for larger ticket items, but the mood of the market was very upbeat. The index futures soared on the news.
S&P 500 (Figure 2)
The bulls retained control of the market throughout most of the morning. The indices pulled back slightly ahead of the open as the futures paused to catch their breath, but they corrected primarily through time over price. This narrow congestion at highs continued into the 5 minute 20 period moving average on the all-sessions charts (Figures 1 and 2). This support zone hit in conjunction with the opening bell and the bulls were once again on the run. The extent of this secondary wave of buying was very comparable to the first, except that the momentum of the buying shifted before the indices had hit an equal move target (blue in Figure 2). That target level was still accomplished, but the slowdown into the morning highs meant that a third run to complete a three-wave uptrend was unlikely.
The 10:00 a.m. ET housing data followed the initial burst of buying out of the open. The week was packed with housing data and most of it was uninspiring, albeit not outright discouraging, and the market shrugged it off. New home sales numbers came in at 288,000, which was worse than the forecast of 295,000, but last month's sales were revised higher by 12,000 to 288,000.
Zillow Home Value Index (Figure 3)
Although prices fell 1.2%, analysts are speculating that prices will stabilize at this level throughout the remainder of the year. After spending a few hours pouring over the housing charts and data myself this weekend, I tend to agree. The downtrend in price action has not ended, but the pace of the decline has slowed dramatically overall and prices appear to be sliding into a support zone. We should not, however, anticipate any sort of strong recovery in the near future. The peak that took place between 2005-2008 is going to be a resistance zone that we should expect to see hold for many years to come, but the current prices are at a level at which new home buyers should at least feel comfortable with their investments.
The indices showed little reaction to the housing report. The market inched higher until striking resistance when the futures hit their equal move level as compared to the 8:30 a.m. ET rally. This took place into 11:30 a.m. ET with slowing momentum. Although this is a typical build-up to a Momentum Reversal, the trend placement and overall time the pattern took to form meant that it was more likely that a longer correction over time would take place throughout the rest of the day with the bulls unwilling to budge before the closing bell. It kept the remainder of the session scalpish with light volume and my personal stance was to just move to the sidelines and avoid the chop.
Nasdaq Composite (Figure 4)
All three of the major indices closed at new four-month highs with this September on track to be the best September performance for the overall market in decades. The Dow Jones Ind. Average is up 8.4% month-to-date, which is the strongest Sept. gain it's had since 1939 if it holds. The S&P 500 is on a similar track. It's up 9.5% so far this month. The Nasdaq Composite outpaced both with a 12.6% gain so far. That would give it its best Sept. gain since 1998.
The Dow Jones Industrial Average ($DJI) posted a gain of 197.84 points, or 1.86%, and closed at 10,860.26 on Friday. All 30 of the Dow's index components posted a gain for the session. The top performers were Caterpillar (CAT) (+4.55%), Alcoa (AA) (+3.92%), Bank of America (BAC) (+3.27%), General Electric (GE) (+3.22%), and Boeing (BA) (+3.11%). The weakest were AT&T (T) (+0.25%), Johnson & Johnson (JNJ) (+0.53%), and McDonalds (MCD) (+0.62%). The Dow ended the week higher by 2.38%.
The S&P 500 ($SPX) rose 23.84 points, or 2.12%, and closed at 1,148.67. 4 stocks in the S&P 500 posted gains over 7%. They included Micron Technology (MU) (+7.95%), Donnelley R R & Sons (+7.88%), Allegheny Tech. (ATI) (+7.15%), and Jabil Circuit (JBL) (+7.02%). Nike (NKE) rose 2.45% after it reported better-than-expected earnings, which led to at least four brokerages raising their price targets on the company stock. The winners topped the losers by 5 to 1 on the New York Stock Exchange and only a dozen of the S&P 500's index components posting a loss. International Game Tech. (IGT) (-2.54%), Archer Daniels Midland (ADM) (-2.24%), and Pioneer Nat. Res. (PXD) (-1.92%) were the only ones to fall more than 1%. The S&P 500 ended the week higher by 2%.
The Nasdaq Composite ($COMPX) ended the session higher by 54.14 points, or 2.33%, on Friday and it closed at 2,381.22. Advancers outpaced decliners by 4 to 1 on the Nasdaq and 15 components of the Nasdaq-100 rose more than 4%. The top gainers were Altera (ALTR) (+5.89%), Sears Holdings (SHLD) (+5.89%), Nvidia (NVDA) (+5.51%), and Lam Research (LRCX) (+5.48%). Amazon.com (AMZN) also rose strongly to post a gain of 5.16% after JP Morgan raise its earnings-per-share estimates and set a 2011 price target of $198. Only 4 of the 100 posted a loss. They were Activision (ATVI) (-0.92%), Oracle (ORCL) (-0.59%), Foster Wheeler (FWLT) (-0.58%), and Apollo (APOL) (-0.51%). The Nasdaq Composite ended the week higher by 2.8%.
The bulls remain in charge as we kick off a new trading week, but my bias heading into October still remains in favor of a larger weekly correction. This week is a light one for earnings data. Earnings season begins in earnest in mid-October. Nevertheless, there are a number of major economic reports due out that are expected to help the market sustain its gains as the Dow approaches the upper daily channel resistance, as well as its 200 week simple moving average. This is the resistance level that held in April. This zone will also be equal move resistance when comparing the September rally to the one off July lows, so continue to remain cautious at these levels for longer term positions.
On Tuesday the week's economic data in the U.S. kicks off with the S&P/Case-Shiller Home Price Index. This measures home-price trends in 20 top markets, is due out. The Conference Board's latest Consumer Confidence Index will also be released on Tuesday.
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.