Earnings Season on the Horizon
Good day! The bears had the lead heading into last weekend. As I mentioned in the column I posted early this past weekend, the gradual upside on Friday afternoon favored follow through on the downside once trading resumed in the index futures on Sunday evening. The follow through was immediate. Although the index futures began trading within Friday's afternoon channel, it quickly broke and prices continued into the zone of Friday's lows before stalling. The pace of the breakdown was not strong enough to penetrate those previous lows, however, and participation was likely an issue as well.
The futures bounced back before midnight on Sunday only to head lower once again into Monday morning. This created a large congestive pattern going into 3:00 a.m. ET on Monday. The market triggered another short setup around that time, but the futures still managed another gradual climb into the opening bell. Despite the bearish action on Sunday and early Monday, the indexes managed to begin the regular trading session relatively unchanged at 9:30 a.m. ET on Monday.
Dow Jones Industrial Average (Figure 1)
Monday's economic data, while positive, was not enough to sway market participants. Factory orders for August were down 0.5%, but transportation equipment - namely commercial aircraft - accounted for the drop. Without that component factored in orders were up 0.9%. Meanwhile, the National Association of Realtors reported that their gauge of pending home sales was up 4.3% in August. Nevertheless, home builders still finished lower.
Although the momentum of price action was bearish from the start on Monday, the bias didn't have much follow through intraday until after 10:30 a.m. ET. At this point the two-wave congestion out o the opening bell on the five-minute time frame broke lower to trigger a sell intraday and confirm the 30-minute channel break (shown condensed on the 15 minute charts). The momentum of the selloff increased after 11:00 ET and continued into the 12:00 ET correction period.
S&P 500 (Figure 2)
It's very common for a morning trend to reverse or stall at noon. This is particularly true when that correction period is combined with strong support. This was the case on Monday. When the correction period hit the S&P 500 and Dow Jones Ind. Average were both testing last week's lows and all three of the major indices were in the measured move target level for the continuation of Thursday's descent in the S&P and Dow and Friday's drop in the Nasdaq. This is shown on the 15-minute charts as well. At the same time, the indexes were testing 20-day moving averages. This led me to believe that we'd seen the session's lows at that point.
As on the previous occasions, however, a rapid recovery on par with the momentum of the selloff was highly unlikely. Nevertheless, the market did hold the corrective bias and trended gradually higher into the closing bell, continuing into premarket trade on Tuesday. This action was very similar to the previous corrections off lows within the past week. Although it is not enough to offer a reversal of the bearish bias on a 60-minute time frame, it is enough to create a bias in favor of a trading range as opposed to favoring a sharp break of the 20-day sma support. As such, my focus will be primarily upon shorter term day trades going into Tuesday's session.
Nasdaq Composite (Figure)
The Dow Jones Industrial Average ($DJI) posted a loss of 78.41 points, or 0.72%, and closed at 10,751.27 on Monday. Only 5 of the Dow's 30 index components posted a gain. The top performers were JP Morgan (JPM) (+0.49%), Verizon (VZ) (+0.43%), and Wal-Mart (WMT) (+0.39%). The worst performers were American Express (AXP) (-6.53%), Alcoa (AA) (-2.53%), Intel (INTC) (-2.33%), and Microsoft (MSFT) (-1.93%). AXP made headlines by announcing that it plans to fight an antitrust suit launched by the Justice Department.
The S&P 500 ($SPX) fell 9.21 points, or 0.8%, and closed at 1,137.03. The S&P's top performers on Monday were Sara Lee (SLE) (+7.22%), Ford (F) (+4.73%), Wynn Resorts (WYNN) (+3.93%), and Kimco Realty Corp. (KIM) (+3.04%). SLE was up following news that it rejected a $12 billion leveraged buyout offer. Meanwhile, shares of Coca-Cola Enterprises (CCE) were down 30.79% after it closed the sale of its North American bottling operation to Coca-Cola Co. (KO). The price drop resulted from a $10 cash distribution as part of the deal. American Express (AXP) (-6.53%) followed on the losers list. Micron Tech. (MU) (-4.12%) and Akamai (AKAM) (-3.93%) were also at the bottom of the list. The weakest sectors included materials, industrials, and technology.
The Nasdaq Composite ($COMPX) ended the session higher by 26.23 points, or 1.11%, on Monday and it closed at 2,344.52. Wynn Resorts (WYNN) (+3.93%), Electronic Arts (ERTS) (+3.16%), and Netapp Inc. (NTAP) (+1.42%) were the strongest stocks in the Nasdaq-100. First Solar (FSLR) (-3.37%) was the biggest loser in the Nasdaq-100, followed by losses in Apollo (APOL) (-3.31%), Flir Systems (FLIR) (-2.64%), and Dentsply Intl. (XRAY) (-2.63%). Microsoft weighed heavily on the Nasdaq as well following a downgrade by Goldman Sachs that left it lower by 1.93%. .
As a reminder: Alcoa (AA) will be kicking off the unofficial start of earnings season after the closing bell on Thursday.
Note: Unless otherwise stated, the index action described below 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.