E-mini markets remain in holding pattern

Good day! Every once in awhile those of us that travel frequently will find ourselves stuck in a holding pattern for some reason or another as we close in our on destination. My most recent incident was spent waiting out a storm with heavy winds over Phoenix, AZ. The market this past week reminded me of that flight, which consisted of several "failed" landing attempts (although my version of failure would have been a bit more severe than merely pulling up from an attempt!) before finally touching down with a rainbow on the horizon.

The market's first attempt this past week to descend from its rally took place on Tuesday following China's move to increase interest rates and concerns that Bank of America (BAC) was facing a suit by The NY Federal Reserve and a consortium of investment banks to buy back mortgages. The Dow Jones Ind. Average has been flirting with its highs for the year and the market's major indices have been bouncing back and forth off 10 and 20 day moving averages throughout the month. Tuesday's drop took the Dow back to its own 20 day sma, although the Nasdaq has continued to display relative strength and found support at its 10 day sma. Since then, the indices returned to the upper end of the daily trading channel with the 15 minute 200 sma serving as support for a second pullback that took place on Thursday.

Dow Jones Industrial Average (Figure 1)

The type of intraday action that we've seen over the past week was in line with our expectations for choppier trade at these levels. The market overall has offered a lot of opportunity for intraday traders as anticipated, but those holding on larger time frames have been met with large day-to-day price swings. There are always nice exceptions, particularly during earnings season, but these focus on individual securities as opposed to those following the indices as a whole.

Friday was particularly brutal on market participants looking for opportunity, but this time it weighed heavily on intraday opportunity as well as the larger time frames. There was a strong divide between the S&P 500 and Dow Jones Ind. Ave. on the one hand and the Nasdaq on the other, which offered greater favor to Nasdaq traders. Although all three of the indices were able to move higher out of a relatively unchanged opening price level, this rally only lasted until the 9:45 a.m. ET correction period. At that point the three major indices began to pull lower. The 5 minute 20 period moving average served as support on the correction, but the S&P and Dow hugged the support on declining volume and broke lower following the 11:00 a.m. ET correction period. Meanwhile, the Nasdaq held above its 20 sma and managed to push to new highs on the day at the same time that the S&P and Dow were moving lower. This is quite an unusual circumstance. Volume in all three of the indices was very light throughout the session, showing an overall lack of conviction and enthusiasm.

S&P 500 (Figure 2)



The Nasdaq continued to trend higher throughout the morning and into the early afternoon. It established three highs on the 10 minute time frame. One was at 9:45 a.m. ET, the second followed with congestion action at highs between 11 and 11:45 a.m. ET, and the third took place into 12:30 ET. This created an ascending wedge between these highs and the 5 minute 20 sma and left the index extended heading into the remainder of the afternoon. Volume continued to drop off and all three of the indices fell into a trading range into the closing bell.

Nasdaq Composite (Figure 3)

The Dow Jones Industrial Average ($DJI) posted a loss of 14.01 points, or 0.13%, and closed at 11,132.56 on Friday. 12 of the Dow's 30 index components posted a gain on the session. The top performers were Hewlett-Packard (HPQ) (+1.11%), Cisco (CSCO) (+0.95%), Disney (DIS) (+0.84%), and Bank of America (BAC) (+0.70%). American Express (AXP) (-3.08%), Verizon (VZ) (-1.32%), Home Depot (HD) (-1.04%), and Pfizer (PFE) (-0.74%) were the biggest losers. The Dow finished the week slightly higher by 0.6%.

The S&P 500 ($SPX) rose 2.82 points, or 0.24%, and closed at 1,183.08. The top performers in the S&P on Friday were Compuware Corp. (CPWR) (+12.47%), NVIDIA Corp. (NVDA) (+6.40%), Anadarko Petroleum Corp. (APC) (+6.33%), and Priceline (PCLN) (+5.76%). Compuware's gains followed better-than-expected fiscal Q2 earnings with strong revenue. The weakest were Leggett & Platt (LEG) (-8.61%), Allegheny Energy (AYE) (-4.89%), FirstEnergy Corp. (FE) (-4.60%), and Ventas Inc. (VTR) (-4.38%). The S&P 500 also finished the week higher by 0.6%.

The Nasdaq Composite ($COMPX) ended the session higher by 19.72 points, or 0.8%, on Friday and it closed at 2,479.39. The top gainers in the Nasdaq-100 were NVIDIA (NVDA) (+6.40%), Priceline (PCLN) (+5.76%), Lam Research (LRCX) (+5.18%), and CA Inc. (CA) (+5.10%). Amazon.com (AMZN) also made headlines. It rose 2.52% and hit all-time highs after reporting earnings following Thursday's close. The top losers were Joy Global (JOYG) (-2.94%), FLIR Systems Inc. (FLIR) (-2.33%), and Qiagen (QGEN) (-1.02%). The Nasdaq Composite ended the week up 0.4%.

Market participants had several reasons to be nervous holding over the weekend. The first is the fact that we're in the middle of earnings season and this always causes jitters. The second, and more influential reason, was a weekend meeting of the G20 finance ministers in South Korea. The Group of 20 (G20) members represent 80% of the world economy. Heading into the meeting, U.S. treasury secretary had Timothy Geithner urged the G20 nations to take an active role, along with the IMF, in helping to correct trade imbalances and put pressure on countries whose currencies are "undervalued", giving them "a competitive advantage". Although aimed primarily at China and the desire to put pressure on the country to revalue the yuan, whose current level makes its exports cheaper worldwide, the message was also directed towards other countries that have been focusing on weakening their own currencies, or at least preventing their appreciation.

A key focus for the participants was the growing concern of a "currency trade war". Together, the finance leaders pledged to move towards market-determined exchange rates and emphasized that members were to "refrain from competitive devaluations" of their currencies. Furthermore, they were to commit to and to pursue actions that would reduce excessive trade imbalances. The G20 communique did appear to appease U.S. officials, although it fell short of Geither's proposal to limit current account imbalances to 4% of the a country's gross domestic product.

This weekend also saw a substantial development within the ranks of the IMF. A number of recent proposals have been focusing upon a rebalancing of power within the IMF's voting ranks. These came to fruition on Saturday with an arrangement that ultimately allows China to usurp Germany, France, and Great Britain to become the third most powerful member of the IMF behind the United States and Japan.

The move gave emerging market countries a greater voices as well. These countries have expressed concerns of their own that the U.S. is "undermining the competitiveness of export industries" by flooding the U.S. banking system with cash through measures known as "quantitative easing".

US Dollar Index (Figure 4)

The actual impact of the weekend's meeting may be subtle. The U.S. Federal Reserve is still expected to launch another round of quantitative easing via bond purchases in the near future. It's next policy meeting is also just around the corner on Nov. 2nd and 3rd. The dollar (DXY) is trading lower in early trade to begin the week, continuing the recent weekly slide, but the dollar index is heading into a major support zone on the weekly time frame as well. It's been trading in a triangle formation for several years and is approaching the lower trend channel following two waves of selling off this year's highs.

Although there is certainly room for lower lows on the daily time frame, I am anticipating a slowdown in the momentum of the selloff and a correction off lows that should continue into early next year. The pace of the downside so far will make a rapid recovery difficult, but a slowdown in the pace of the selling, leading to a series of slightly lower lows, would allow for a more rapid bounce.

EUR/USD (Figure 5)

Sustainability will be another matter. In order for the dollar to truly recover, the rally would need to be at least as strong as this year's selloff and then be followed by a slower correction to allow for a longer-term break to the upside. Right now if we look at the EUR/USD as an example, however, it appears more likely that this level of support in the DXY and resistance in the EUR/USD will merely lead to corrections more through time than price and be followed by a continuation of the weekly trends. In the EUR/USD, the major support for such a correction will be the 20 week sma.

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.

About the Author
Toni Hansen

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.

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