Good day! Premarket trading activity heading into Wednesday morning had the session pegged as a corrective one following Tuesday's strong uptrend that took place after the Bank of Japan surprised market participants with a cut in its interest rates and the Institute for Supply Management reported improvement in the service sector in September. From the technical standpoint, the rally was also a reactionary move following the previous week's decline into the 20 day moving averages in the major indices.
Dow Jones Industrial Average (Figure 1)
No matter what the main cause was, the result was a strongly trending session that continued to post higher highs and higher lows going into the closing bell with the 5 minute 20 sma serving as support for the trend. Although it remained strong into the close, however, the pace of the trend was slowing throughout the afternoon when compared to the initial surge of buying. This created the start of a Momentum Reversal in the indices that hinted at further corrective activity into Wednesday morning as I mentioned in yesterday's column.
When an index or individual security starts to round off at highs, barely breaking previous highs before pulling back once again, it is often a warning sign that the bulls are struggling to maintain control. Rapid corrections are common, although the extent often depends upon where prices are in the larger trend. This "rounding off at highs" continued in afterhours trade on Tuesday evening and into premarket trade on Wednesday.
The first trigger on the short side for this Momentum Reversal took place at 6:00 a.m. ET. The Nasdaq futures had established a set of three highs on the 5-15 minute charts and the trigger took place as the channel heading into the third high broke lower. (You can learn more about this strategy in my Market Timing course at http://www.tonihansen.com.) A secondary entry came at on the heels of the ADP National Employment Report 8:15 a.m. ET. It showed a 39,000 drop in payrolls for private-sector employment in September. The numbers were very disappointing. Analysts had anticipated a 20,000 INCREASE. Another study indicated that planned layoffs were also on the rise and although temp jobs have increased, longterm employment options remain dismal.
S&P 500 (Figure 2)
The indices did manage to recover following the ADP data, but prior highs served as strong resistance and those levels held into the opening bell. Intraday activity was choppy, but the strongest action was on the downside. The tech-heavy Nasdaq was the weakest. It triggered at 15 minute Momentum Reversal into the opening bell. This Dow Jones Ind. Average didn't follow suit until noon. At that point the Nasdaq kicked off a continuation move and fell back into price congestion from Friday afternoon. This move took the stronger Dow back into an earlier low.
The mid-day selloff was one of the cleanest trend moves of the session. It consisted of two equal waves of downside out of the Dow's 5 minute triangle and off the Nasdaq's 15 minute 20 sma resistance. The equal move target level corresponded perfectly to the prior low in the Dow from about 8:30 a.m. The indices crept higher throughout the remainder of the session. Given the volume and momentum, I thought we had a good chance for seeing another wave of selling in the final hour of trade, but the bulls were resilient. They managed to break the 15 minute 20 sma barrier and the S&P 500 ended the day relatively unchanged.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a gain of 22.93 points, or 0.21%, and closed at 10,967.65 on Wednesday. 2/3 of the Dow's 30 index components finished the session higher or unchanged. The top performers included General Electric (GE) (+2.36%), Alcoa (AA) (+1.89%), Cisco Systems (CSCO) (+1.46%), 3M (MMM) (+1.16%), and Exxon Mobil (XOM) (+1.07%). Only Bank of America (BAC) (-1.25%) and AT&T (T) (-1.11%) posted losses over 1%. AT&T (T) came under pressure on news that Apple plans on releasing the iPhone for Verizon early next year.
The S&P 500 ($SPX) fell 0.78 point, or 0.07%, and closed at 1,159.97. Massey Energy (MEE) (+6.09%) was the strongest performer in the S&P 500 following an analyst upgrade and ahead of the release of news from the day's shareholder meeting to vote on governance changes. Constellation Brands Inc. (STZ) (+4.28%) managed a strong recovery after opening sharply lower following news that its second-quarter net income fell 8%. CB Richard Ellis Group (CBG) (+3.11) and Helmerick & Payne (HP) (+2.72%) rounded off the top four. Business software maker Citrix Systems (CTXS) was the second largest loser on the Nasdaq and the biggest decliner in the S&P 500 after falling 14.07% in sympathy with data center services provider Equinix's (EQIX) warning that its third-quarter sales would be lower than its previous forecast. EQIX was the top decliner on the Nasdaq (-33%). Salesforce.com (CRM) fell 7.87% and was the second-larger decliner in the S&P 500, while Red Hat (RHT) fell 7.66% and came in third from the bottom. Both are in the same sector.
The Nasdaq Composite ($COMPX) ended the session lower by 19.17 points, or 0.8%, on Wednesday and it closed at 2,380.66. The top three stocks in the Nasdaq-100 were JB Transport Services (JBHT) (+1.69%), Cisco Systems (CSCO) (+1.46%), and Joy Global (JOYG) (+1.25%). The weakest were Citrix Systems (CTXS) (-14.07%), Netapp Inc. (NTAP) (-6.32%), and Nvidia Corp. (NVDA) (-4.77%).
Thursday will bring several noteworthy events for market players. The day will kick off with the weekly report on jobless claims, followed in the afternoon by the Federal Reserve's consumer credit data. The Alcoa (AA) kicks off the unofficial start of earnings season after the closing bell. AA is expected to earn 5 cents a share with revenue of $4.95 billion.
I don't have a strong bias for price action for Thursday's yet. The index futures are mid-range with comparable upside and downside momentum on the 60 minute charts, so the overall action is still channel-bound on that time frame. The smaller 15 minute time frames are showing more of a bearish bias heading into midnight, but the daily charts still have potential to further the gains made on Tuesday. Since they are at odds with each other at the moment, I'll be sticking to smaller, intraday strategies again heading into the session.
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.