Good day! The indices are on track to log their strongest month in a year this September, making it the strongest September since that late 30s in the S&P 500 and Dow Jones Ind. Average... as long as it holds. Monday's focus was upon corporate deal-making with a number of companies in the midst of merger and acquisition talks. This focus dominated an otherwise lack-luster session. Although this week is a busy one for economic data, it doesn't really kick off until Tuesday. Last week's focus on housing will continue with the S&P/Case-Shiller Home Price Index on Tuesday morning. This measures home-price trends in 20 top markets. The Conference Board's latest Consumer Confidence Index will also be released in the morning.
Dow Jones Industrial Average
Monday's session was a slow one for the market, which took pause to catch its breath after Friday's strong rally. The momentum in the indices was shifting on Friday throughout most of the session following the strong opening gap. The indices made slightly higher highs throughout the day, which created the beginning of a Momentum Reversal into the closing bell. Because of the weekend, however, the indices couldn't do much about it until trading resumed in the futures on Sunday evening at the point the pattern triggered. The index futures held the zone of opening highs on Sunday evening and began a steady selloff that continued into the early morning hours on Tuesday.
Sunday evening's reversal off highs was not as strong as most Momentum Reversals because of the length of time it took to develop compared to Friday. An ideal Momentum Reversal could have taken an entire 24 hours or more with three clear-cut highs before a sharp breakdown could have taken place. Instead, the earlier trigger led to more rounded highs with the indices stepping lower into Tuesday morning.
Intraday activity in the markets on Monday did not readily reflect the premarket pattern. For day traders, the action would have seemed a great deal more random and choppy. A premarket base at lows broke lower into the opening bell to trigger an initial wave of intraday selling. An attempt to break lower again failed out of the 10:45 ET correction period and the zone of the previous lows held.
Although the indices based at that support throughout mid-day, the pace within the range itself from 11:15 to 13:30 ET was bullish. The indices were hugging the upper end of the mid-day range with stronger upside momentum within the range itself. This helped the market break higher around 13:30 ET to return to the upper end of the trading range. At that point, however, a clear-cut Momentum Reversal (TM) formed on the 2-5 minute time frame and the indices turned lower in the final hour of trade. This, combined with the continuation move into the final 30 minutes of trade, was the cleanest price action of the intraday session.
The Dow Jones Industrial Average ($DJI) posted a loss of 48.22 points, or 0.44%, and closed at 10,812.04 on Monday. Although all of the Dow's 30 index components posted a gain on Friday, only 6 managed to do so to kick off the week. The top three were AT&T (T) (+1.01%), American Express (AXP) (+0.72%), and Hewlett-Packard (HPQ) (+0.68%). The weakest performers were Bank of America (BAC) (-2.65%), Travelers (TRV) (-1.81%), JP Morgan (JPM) (-1.69%), and General Electric (GE) (-1.38%).
The S&P 500 ($SPX) fell 6.51 points, or 0.57%, and closed at 1,142.16. Southwest Airlines (LUV) was the best performer in the index (+8.71%) after the nation's largest low-cost carrier surprised investors by announcing that it agreed to buy its smaller rival AirTran Airways. Juniper Networks (JNPR) (+4.20%) and Pulte Group (PHM) (+3.56%) were other top performers. The top loser was also a result of merger talks. M&T (MTB) shares ended lower by 7.04% after the Wall Street Journal reported that its talks to buy the Spanish bank Sovereign Bank hit a wall. Intuit Surgical (ISRG) (-5.01%) followed with a strong loss of its own after reversing off its 50 day sma. Monsanto Co. (MON) also came under pressure with a loss of 4.17%.
The Nasdaq Composite ($COMPX) ended the session lower by 11.45 points, or 0.48%, on Monday and it closed at 2,369.77. Baidu (BIDU) extended its all-time highs by tacking on another 6.12%. Symantec Corp. (SYMC followed distantly with a gain of 1.85%. KLA-Tencor (KLAC) rounded off the list of stocks that topped 1% with a gain of 1.08%. Intuitive Surgical (ISRG) (-5.01%) was the Nasdaq-100's biggest loser, but Sears Holdings (SHLD) (-3.50%), Wynn Resorts (WYNN) (-3.41%), and Vertex Pharmaceuticals (VRTX) (-3.23%) all fell by more than 3%.
My bias for the market has not changed this week. I am still favoring the bulls holding up the market into October. At that point I expect the market to correct from the September rally. Currently it favors a more gradual correction, but this could change if the indices struggle and establish a series of slightly higher highs on the daily time frame like they did heading into August. Earnings season also begins in mid-October and this is a typical starter cue for corrective moves in the market.
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.