Good day! The S&P 500 and Dow Jones Industrial Average both posted their strongest September gains in nearly 3/4 of a century last month. They held onto their bias in favor of another new higher high thanks to strong economic data on Thursday, but it was a slow start. When I wrote Thursday's column the index futures were still showing weakness. In fact, they were basing at afterhours lows and favored further selling, which went against the larger daily bias that we've been following. This bearish bias did end up playing out in the early morning hours with a break lower followed by three waves of downside on a 5 minute time frame before the breakdown trend exhausted itself with a third push lower heading into 2:00 a.m. ET.
Dow Jones Industrial Average
At 2:00 a.m. ET the index futures were not only extended in terms of trend development, but also price. The futures market was testing lows from the previous day, which served as a strong support zone. This zone held and a rather rapid recovery followed. The market returned to afterhours highs before stalling at that resistance zone and falling into a longer trading range once again. This was an upper level range (and hence bullish) in the premarket and consisted to two waves of correction into the 8:30 a.m. ET economic data.
The momentum bias within the range itself was also in favor of the bulls. Well-received economic data merely sealed the deal. The Labor Department reported that applications for jobless claims fell by 16,000 last week, which was more than expected, and hit 453,000. Additionally, the second-quarter gross domestic product (GDP) was slightly higher than earlier estimates and came in at 1.7%. The Chicago PMI, which gauges the regional economy, rose to 60.4 in September, up from 56.7 in August. Readings over 50 indicate expansion.
The index futures shot sharply to the upside on these reports, breaking strongly out of the premarket trading range to trigger a technical buy as well. The rally continued into the 9:45 a.m. ET correction period, but at that point it began to struggle. The Nasdaq was hitting previous daily highs and the Dow was running into resistance at its upper channel levels on the daily time frame. The pace of the buying slowed and by 9:20 ET the market peaked.
The indices corrected slowly to begin with. This was largely due to the rapid pace of the overall rally. When the 5 minute 20 period moving average hit, however, the pace shifted. The indices hugged the moving average on light volume. This created the Avalanche type of pattern I wrote about in Thursday's column. It triggered on the early side coming out of the 10:45 ET correction period, but followed through extremely well into noon. At that point the indices hit the lower end of the daily trading channel and the market once again found support. The indices corrected steadily with two waves of upside off lows into 15:00 ET before heading lower again into the close.
The Dow Jones Industrial Average ($DJI) posted a loss of 47.23 points, or 0.44%, and closed at 10,788.05 on Thursday. Boeing (BA) (+0.86%) was the best performer in the Dow. It had triggered a daily buy setup on Wednesday with Phoenix™ when it broke through its 100 day moving average. The weakest components of the Dow were American Express (AXP) (-2.28%), Caterpillar Inc. (CAT) (-1.64%), Pfizer (PFE) (-1.32%), and Kraft Foods (KFT) (-1.12%).
The S&P 500 ($SPX) fell 3.53 points, or 0.31%, and closed at 1,141.20. The best performers in the S&P 500 were Devry Inc. (DV) (+4.95%), American Intl. Group (AIG) (+4.41%), Tyson Foods (TSN) (+3.89%), and Tenet Healthcare (THC) (+2.83%). AIG announced plans to begin to repay funds from the government's bailout. The weakest performers were Prudent Financial (PRU) (-4.16%), CF Inds. Holdings (CF) (-3.88%), JDS Uniphase Corp. (JDSU) (-3.35%), and Symantec Corp. (SYMC) (-3.07%).
The Nasdaq Composite ($COMPX) ended the session lower by 7.94 points, or 0.33%, on Thursday and it closed at 2,368.62. Logitech Intl. (LOGI) (+3.50) was the best performer in the Nasdaq-100. It was followed by Apollo Group (APOL) (+2.11%) and Qualcomm (QCOM) (+1.85%). Foster Wheeler (FWLT) (-3.09%), Symantec (SYMC) (-3.07%), Citrix Systems (CTXS) (-2.81%), and SanDisk (SNDK) (-2.63%) were the biggest losers in that index, which tracks the top 100 stocks in the Nasdaq.
The market will have a lot of data to contend with once again on Friday. Personal income and spending for August, consumer sentiment, construction spending, and the ISM manufacturing index are all due out in the morning. The index futures have been trending higher since noon on Thursday. A third wave to the upside took place between 3-6 a.m. ET.This is creating some exhaustion in the premarket. The larger daily trend is also weakening. While Friday's action intraday will likely be news-driven, the underlying struggle to push higher is starting to weaken. As I mentioned all week, October is typically a corrective month for the market and so far it's continuing to favor that bias.
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.