Good day! Throughout the past week I've been carefully tracking the market's steady move to higher highs. Every time the market has attempted a new high, it served as a trap and the indices quickly retreated. This was in line with our expectations heading into the week. The September rally was starting to weaken as the Dow approached its upper daily trading channel limits (Figure 1) and the S&P 500 and Dow Jones Ind. Average were both coming into equal move targets when the September rally is compared to the summer upswing (shown in blue). This left more risk on the table for any bulls late to the game. It also meant that a change in the pace of the rally was likely.
Dow Jones Industrial Average (Figure 1)
The market spent the entire week living up to this expectation last week. Tuesday, Thursday, and Friday all experienced extreme momentum selloffs early in the morning and each time it had greater difficultly recovering. On Thursday the afternoon recovery continued into afterhours trade, which continued further into the early morning on Friday. The index futures stepped higher and each step up was followed by a more rapid correction to the lower end of the uptrend channel that began at noon on Thursday. In the last push higher into the opening bell the index futures hugged the support zone from the 15 minute 20 period moving average. This is a bearish trait.
When the opening bell rang the bears did not need much incentive to take over. After all, I was not the only one starting to suspect that September's rally was starting to become overinflated. Whether this ends up being the end of the current run or a pause like the one that took place in the March rally is yet to be determined. The pace of the overall upside, particularly in the Nasdaq, is still extremely strong and, as discussed several times over the past couple of weeks, a correction that begins at this point on the weekly time frame would likely be a gradual one compared to the rally. The S&Ps would have an easier time pulling lower than the stronger Nasdaq.
S&P 500 (Figure 2)
Once again, the best action intraday on Friday was in the morning. The breakdown into 10:00 a.m. ET corresponded to several of the data releases. The Institute for Supply Management's purchasing managers index came out at that time and showed a drop from 56.3 in August to 54.4 in September. This was more than the reading of 54.8 that economists had been anticipating and meant a new 9-month low. The rest of the data was not as bleak, but was not enough to lure in further buyers. Construction spending grew 04.% in August and the Thomson Reuters/University of Michigan's consumer sentiment index rose from a preliminary reading of 66.6 to 68.1. This was better-than-anticipated, but lower than August's reading of 68.9. Earlier, the Commerce Department reported that personal incomes rose 0.5% in August, while personal spending rose 0.4%.
The morning selloff on Friday hit support at 10:30 ET. All three of the major indices closed their gaps, but the Nasdaq did so the quickest. When the S&P 500 and Dow Jones Ind. Ave. closed their own gaps the market's selloff stalled. The indices slowed and managed to bounce slightly before basing to form a 5 minute Phoenix™. This buy strategy triggered at 11:30 ET and the new uptrend continued into the closing bell. It was another gradual trend similar to the one that took place on the 15 minute charts beginning at noon on Thursday in the index futures and continued into Friday's opening bell. The market started to break lower from the 5 minute version that formed on Friday afternoon into the close, but was saved by the bell. That bias, however, will remain intact heading into Sunday evening.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a gain 41.63 points, or 0.39%, and closed at 10,829.68 on Friday. The top performers in the Dow were the financials JP Morgan (JPM) (+1.97%) and Bank of America (BAC) (+1.53%). Hewlett-Packard (HPQ) was the weakest of the Dow's 30 index components. It fell 3.09% after Leo Apotheker was named its new chief executive. It was followed by a 0.59% loss in American Express (AXP) and a 0.58% Merck (MRK). The Dow ended the week lower by 0.3%. It's up 3.9% year-to-date.
The S&P 500 ($SPX) rose 5.04 points, or 0.44%, and closed at 1,146.24. Citigroup (C) was the best performer in the S&P 500 (+4.60%), It was followed by MetroPCS (PCS) (+4.49%), Freeport McMoran Copper & Gold (FCX) (+4.38%), and Cliffs Natural Resources (CLF) (+4.16%). The top losers were Tenet Healthcare (THC) (-4.03%), Abercrombie & Fitch (ANF) (-3.99%), and Sears Holdings (SHLD) (-3.35%). The S&P 500 ended the week lower by 0.2%, while it's up 2.8% year-to-date.
The Nasdaq Composite ($COMPX) ended the session higher by 2.13 points, or 0.09%, on Friday and it closed at 2,370.75. Infosys Tech. (INFY) (+4.77%), Liberty Media Corp. (LINTA) (+3.65%), Research In Motion (RIMM) (+3.12%), and Nii Holdings (NIHD) (+2.94%) were the top gainers in the Nasdaq-100. Warner Chilcott (WCRX) (-4.06%), Baidu (BIDU) (-3.72%), and Sears Holdings (SHLD) (-3.35%) were the weakest. The Nasdaq Composite ended the week lower by 0.4%, while it is up 4.5% year-to-date.
Although it didn't have that much of an influence on the markets, Friday's auto sales report also made headlines. Sales for General Motors, Ford, and Chrysler were all stronger than anticipated. GM's sales rose 22% from last September, while Ford (F) sales were up 46% in September.
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.