Good day! The market had a rough and tumble session on Thursday. The momentum within the index futures had shifted overnight in favor of the bears, but lacked a confirmation move by the time yesterday's column went to press. The indices hit support at 6:00 a.m. ET after a strong decline, but were still in a larger trading range when that support hit and the market needed a slower upside move to offer lower risk on further downside. This took place between 6:00 and 8:00 a.m. ET. At 8:30 a.m. ET the day's economic data in the U.S. hit the wires and the congestion broke to the downside with another strong wave of selling into the opening bell.
Dow Jones Industrial Average (Figure 1)
According to the U.S. Department of Labor, weekly jobless claims rose 13,000 last week. Analysts were anticipating an increase of only 5,000. Continuing claims, however, fell from 4.5 million to 4.4 million. Meanwhile, the overall Producer Price Index climbed 0.4% in September, while the Core PPI rose 0.1%. The Core PPI excludes food and energy prices. The increase in the overall PPI was higher than analyst estimates. An additional report also made note that the trade deficit had widened from $42.58 billion in July to $46.35 billion in August. On Friday keep an eye out of the latest CPI and retail sales, as well as the Empire State Manufacturing Survey and the newest consumer sentiment readings. Also watch out for earnings from General Electric (GE) and Mattel (MAT) before the opening bell.
The market bounced into 10:00 a.m. ET, but the pace remained bearish. The indices hit resistance into 11:00 a.m. ET at the 15 minute 20 sma and turned lower once again into noon. This marked the third leg of downside on the all-sessions charts (which include the premarket data) and left the trend extended on that time frame. In order to compensate for the pace of the selling, the support didn't hold very well to begin with. The market established a series of slightly lower lows, which created a Momentum Reversal™ on the 5 minute time frame first and then another larger one on the 15 minute time frame going into 15:00 ET. This left the indices with a bullish bias intraday going into the final hour of trade.
S&P 500 (Figure 2)
Although things were already set up for a bounce, the extent of that bounce was amplified by the afternoon's earnings data. After the close, Google (GOOG) reported earnings of $7.64 a share with revenue of $5.48 billion. Earnings were up 29.7% year-over-year, while revenue was up 25.1%. The news beat the Street's estimates. Advanced Micro Devices (AMD) also outperformed following earnings of 15 cents a share on revenue of $1.6 billion.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a loss of 1.51 points, or 0.01%, and closed at 11,094.57 on Thursday. A third of the Dow's 30 index components posted a gain for the day. The top performers included McDonalds (MCD) (+1.70%), Kraft Foods (KFT) (+0.98%), IBM (+0.81%), and Verizon (VZ) (+0.71%). The financials topped the loser's category. Those with the greatest exposure to risk associated with foreclosures were the primary victims following the latest report on increasing foreclosure rates. Bank of America (BAC) was down 5.19%, which JP Morgan (JPM) fell 2.81%.
The S&P 500 ($SPX) fell 4.29 points, or 0.36%, and closed at 1,173.81. EMC Corp. (EMC) was the top performer in the S&P 500 on Thursday. It was followed by Yahoo (YHOO) (+4.46%), First Solar (FSLR) (+3.90%), and Coca Cola Enterprises (CCE) (+3.69%). Apollo (APOL) was the biggest loser. It fell 23.23% after it pulled its 2011 forecast. This took Devry Inc. (DV) down with it to the tune of -16.83% on future student enrollment concerns. Also gracing the bottom of the pile were H&R Block (HRB) (-10.08%) and Washington Post (WPO) (-8.95%).
The Nasdaq Composite ($COMPX) ended the session lower by 5.85 points, or 0.24%, on Thursday and it closed at 2,435.38. Priceline (PCLN) (+2.35%) followed YHOO and FSLR on the gainer's end in the Nasdaq-100. Vodafone Group (VOD) (+1.98%) and Vertex Pharmaceuticals (VRTX) (+1.81%) also fared well. NII Holdings (NIHD) (-12.25%) came in after APOL on the losing side after a report that Televisa planned to pull out of its proposed joint venture with Nextel. The third largest loser was in a distant third place, but still fell 3.10%.
The sharp rally afterhours once again took the index futures to the upper end of a daily trading channel, which was recently extended due to the gains earlier in the week. The market will need time to correct from such a move. The rally was similar to the rally that took place on the 8th. There is a strong "rounding off" at highs taking place in the indices. This will not immediately signify and end to the current upside action, but it does mean that the bulls are still struggling and that the risk for sharp intraday selloffs remain very high and will keep risk on swingtrades on the upside elevated as well.
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.