Dow hits six-month high but struggle ensues

Good day! A great deal of "lip service" was given to Monday's unexpected jump in existing home sales in September. A number of news sources were citing it as the motivating factor for the strong morning that was seen in the markets to kick off the trading week. In reality, this news brought an end to the session's opening strength.

The index futures were breaking higher out of a narrow and light volume trading range heading into the weekend. This trigger followed through when trading resumed on Sunday evening after the weekend's G20 finance meeting detailed in yesterday's column. The G20 urged less government intervention in currency manipulation, particularly with regard to weakening currencies to gain an edge. Additionally, greater clout was given to emerging market countries with a shift in the seats of the IMF. It was in the wake of these events that futures prices pushed higher, along with further weakening of the US dollar (DXY).

Dow Jones Industrial Average (Figure 1)

The futures rally continued into Monday's opening bell and pushed higher, leading to a new 6-month high in the Dow Jones Industrial Average, which flirted throughout the day with the yearly highs made in April. By the time the 10:00 a.m. ET housing data was released, the futures were already very extended on the short-term. The Dow's highs of the day were made at exactly 10:00. The momentum shift was immediate.

Although home purchases were up 10% to an annual rate of 4.53 million from 4.12 million in August, according to the National Association of Realtors, August's numbers were revised lower and sales are still off 19.1% year-over-year. The median price of a home was also down 2.4% year-over-year and 25.2% off the highs in August 2005. Distressed sales made up 35% of the market with 32% of buyers being first-time home owners.

S&P 500 (Figure 2)



From 10:10 a.m. ET to 10:30 a.m. ET the indices traded in a narrow range off highs. Volume dropped off sharply during this time, providing further favor for the bears. The Avalanche™ pattern resulting from this period of congestion led to a strong increase in selling pressure once the range broke lower. The indices found support in the zone of the 5 minute 20 period moving average. This selloff was followed by a longer period of congestion whereby the volume once again decreased. The resulting pattern was the same, but on a larger time frame. A comparison of the 10:00 a.m. ET reversal on the 5 minute time frame will look remarkably similar to the one on the 15 minute time frame. This larger Avalanche™ broke lower out of the 12:00 ET correction period and continued until the indices struck support at their 15 minute 20 period moving averages.

The market remained weak into the closing bell, giving up another chunk of the morning's gains in the final 30 minutes of trade. The indices barely managed to finish the session in positive territory. The zone of the morning lows served as closing support for the Nasdaq, while Friday's highs supported the S&P 500 and Dow futures just above Friday's closing levels.

Nasdaq Composite (Figure 3)

The Dow Jones Industrial Average ($DJI) posted a gain of 31.49 points, or 0.28%, and closed at 11,164.05 on Monday. 23 of the Dow's 30 index components posted a gain on the day. The leaders included DuPont (DD) (+1.86%), Kraft Foods (KFT) (+1.79%), Disney (DIS) (+1.40%), and Alcoa (AA) (+1.26%). The weakest performers were the mortgage-related financials: Bank of America (BAC) (-2.45%) and JP Morgan (JPM) (-1.67%).

The S&P 500 ($SPX) rose 2.54 points, or 0.21%, and closed at 1,185.62. Advanced Micro Devices (AMD) (+5.37%) was the strongest performer in the S&P 500. Following closely at its heels were Eastman Chemical (EMN) (+5.08%), Dow Chem. (DOW) (+4.50%), and Salesforce.com (CRM) (+4.27%). Radioshack (RSH) (-9.04%) was the weakest performer. Other notable losers included Avon Products (AVP) (-4.10%) and Leggett & Platt Inc. (LEG) (-3.43%).

The Nasdaq Composite ($COMPX) ended the session higher by 11.46 points, or 0.46%, on Monday and it closed at 2,490.85. Research In Motion (RIMM) (+5.49%) was the top gainer in the Nasdaq-100. It was followed by Urban Outfitters (URBN) (+2.91%), Altera Corp. (ALTR) (+2.65%), and Lam Research (LRCX) (+2.58%). The weakest shares were Foster Wheeler (FWLT) (-5.74%), Seagate Technology (STX) (-2.44%), and Liberty Mutual Corp. (LINTA) (-1.09%).

As we head into Tuesday there is very little motivation for the market to break out of the daily trading channel that it has been in over the past several weeks. The channel is very comparable to the action heading into mid-April earlier this year, although hopefully without the dramatic results. November's elections are just around the corner now here in the States, and this, along with a wind-down in earnings season, will be a powerful combo to crack that channel.

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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