Market Boasts Strong Rally, but Can It Continue?
Good day! The market had its strongest session in a month on Tuesday when the correction off Monday's lows gained steam in premarket trade. On Monday the indices hit strong support at the 20 day moving average zones for the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. This was also measured move support as I mentioned in Monday's evening column. It was enough to send the indices higher into Monday's closing bell, but it was the action that took place following the bell that set the tone for Tuesday morning. This can be seen on the 15 minute charts of the S&P 500 e-Mini (ES).
After an initial correction off the daily and intraday support heading into the close, the market stalled its rally. The index futures spent the remainder of the day in a very narrow trading range at the afternoon highs in after hours trade. Midnight marked a turning point. By hugging resistance, the bias in the market shifted from being merely a gradual correction similar to the one heading into Friday morning to a stronger reversal that would eventually take the indices back into the upper end of the daily trading channel.
Dow Jones Industrial Average
The futures triggered a buy setup shortly after midnight. This was followed by a gradual pullback into the trading range with a continuation move out of 3:00 a.m. ET. That breakout took the market back into premarket price resistance from Monday morning, but another gradual correction kept the momentum from shifting once again and a trading range along the highs heading into 8:00 a.m. ET finally offered stronger confirmation for the bulls.
The premarket rally did have some help from abroad. The Bank of Japan cut its rates to 0.0%-0.1%. This is even lower than the federal funds rate in the U.S. A strong rally was already underway before the opening bell even rang. By that point the index futures were already testing Monday's highs. This did stall the rally for the first half hour of the day, but the indices held onto highs during that time and broke higher once again following the 10:00 a.m. Institute for Supply Management's Non-Manufacturing Index data. The index reported that its figure measuring new export orders jumped to 58 in September from a previous reading of 46.5. Anything over 50 indicates expansion. The overall non-manufacturing index climbed from 51.5 in August to 53.2 in September, beating expectations of a move higher to 52.
The upside gap and initial buying on Tuesday morning left the market on the extended side intraday. The bulls were still in charge, but the earlier action prevented strong continuation plays from developing. In order to see a strong continuation move form, the market would have needed to have formed a trading range lasting up to two days (or at least a gradual pullback during that time) without any change in the upside momentum prior to that pullback. This was how the downside continuation was able to form on Monday to pick up last Thursday's morning selloff. Instead, the shift to adding slightly higher highs throughout the morning allowed the trend to continue, but in short bursts with the five-minute sma serving as support. This weakened the trend further ahead of the close and it rounded off at highs afterhours with a corrective bias as a reaction to upper channel resistance now in play going into Wednesday morning.
The ADP employment change provided a continuation of that bias after an initial corrective move triggered at 6:00 a.m. ET. I wouldn't rule out the bulls quite yet though. Due to the rally on Monday, the daily charts now still have room for further upside before turning lower. October remains a typical month for larger weekly and monthly reversals to begin, but so far the smaller 60-minute corrections aren't offering opportunities for larger confirmation. Wednesday will be a session where focusing on smaller, intraday strategies will be ideal as compared to larger 60-minute or daily triggers.
The Dow Jones Industrial Average ($DJI) posted a gain of 193.45 points, or 1.8%, and closed at 10,944.72 on Tuesday. 29 of the Dow's 30 index components posted a gain. They were led by Boeing (BA) (+3.42%), Bank of America (BAC) (+3.12%), DuPont (DD) (+3.04%), and United Technologies (UTX) (+2.81%). The only loser was American Express (AXP), which continued to selloff following its announcement that it will fight the antitrust allegations made by the Justice Department.
The S&P 500 ($SPX) rose 23.71 points, or 2.09%, and closed at 1,160.74. Top performers in the index included Harley Davidson (HOG) (+9.08%), Juniper Networks (JNPR) (+5.98%), Marshall & Ilsley Corp. (MI) (+5.91%), Pioneer Natural Resources (PXD) (+5.75%), and JC Penney (JCP) (+5.26%). Slightly over a dozen of the S&P 500's index components posted a loss, amounting to only a small fraction of the total. The weakest amongst them were Iron Mountain (IRM) (-8.58%), American Express (AXP) (-1.97%), Colgate Palmolive (CL) (-1.96%), and DR Horton (DHI) (-1.28%).
The Nasdaq Composite ($COMPX) ended the session higher by 55.31 points, or 2.36%, on Tuesday and it closed at 2,399.83. 9% of the Nasdaq-100's index components posted gains over 4%. The top gainers included Baidu Inc. (BIDU) (+6.73%), Electronic Arts Inc. (ERTS) (+5.07%), Sears Holdings Corp. (SHLD), and News Corp. (NWSA) (+4.47%). Only Marvell Technology Group (MRVL) (-1.97%), Ross Stores Inc. (ROST) (-0.35%), and BMC Software Inc. (BMC) (-0.35%) posted a loss.
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 EMini 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.