Good day! As the day wound to a close on Monday, the market was in the midst of a wave of consecutively larger and larger Avalanche™ breakdowns discussed in greater detail yesterday's column. The first one took place early in the session coming out of the 10:00 a.m. ET existing home sales data on a 2 minute time frame whereby the indices held their 2 minute 20 sma with a period of congestion before breaking lower. Another followed on the 5 minute time frame along the 5 minute 20 sma zone going into noon. Finally, the day wrapped up with the indices hugging their 15 minute 20 period moving averages and showing weakness with a final flush lower into the closing bell. This short setup followed through into Tuesday morning, keeping the indices squarely in the middle of its daily trading channel.
Dow Jones Industrial Average (Figure 1)
The market gapped strongly lower into Tuesday's opening bell. The opening price level for three major indices corresponded to a number of support zones, including the 15 minute 200 period moving average intraday, the 10 day moving average, and price congestion from last week. It was also equal move support on the Dow Jones. Ind. Ave. when the early-morning breakdown is compared to Monday's selloff (Figure 2). Larger-than-average gaps in the indices have a tendency to close on the morning of the gap, particularly when they take place heading into strong support or resistance. The typical exceptions occur when the gaps trigger a larger time frame setup. That was not the case on Tuesday, since the gap remained within the larger daily channel. So, the bias towards a gap closure remained.
There are a couple of strategies I will use for trading gap closures in the indices and they tend to depend upon what is happening within the first 5 minutes of the day. During this time I'll drop down to a 1 minute chart and use tick charts for added confirmation. If the bias is bullish right away, I'll use minor bases near highs that form in the initial several minutes of trade for a break higher. This will typically trigger 4-6 minutes after the opening bell. If there is weakness to begin with, I'll wait about 15 minutes and drop down to the smaller time frames, waiting for strength to return. A simple way to trade this is to merely take a break in the highs of the first 15 minutes of the day with a stop under the intraday lows. My Mastering Momentum Gaps course goes into greater detail on specific strategies for these gaps, but you'll find that this basic setup one a great starting point.
S&P 500 (Figure 2)
The majority of the day's gains off opening levels took place within the first hour of trade on Tuesday. The S&P/Case-Shiller home price index data ahead of the open was met with little fanfare. Prices showed signs of stabilization, but were lower in 19 of the 20 markets tracked. The 10:00 a.m. ET consumer confidence data, on the other hand, was viewed favorably and the immediate reaction helped the indices close their morning gaps. Consumer confidence rose from a revised 48.6 in September to 50.2 in October. A reading of 49.2 was anticipated.
The momentum of the morning rally did slow once the opening gap was filled in the indices. The Nasdaq managed to display the best relative strength and continued to push higher into the early afternoon. It eventually retested Monday's afternoon highs. The S&P 500 and Dow Jones Ind. Average were weaker and only recovered into the zone of Monday's closing lows and the 15 minute 20 sma. Prices rounded off at this level and the market flushed lower mid-afternoon, although the indices did manage to recover in the final 2 hours of trade to post another, albeit minor, daily gain.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a gain of 5.41 points, or 0.05%, and closed at 11,169.46 on Tuesday. Just over half of the Dow's 30 index components posted a gain. The top performers were Microsoft (MSFT) (+2.82%), American Express (AXP) (+2.04%), Disney (DIS) (+1.41%), Bank of America (BAC) (+1.25%), and Wal-Mart (WMT) (+1.13%). The biggest losers were Procter & Gamble (PG) (-1.07%), Travelers (TRV) (-1.01%), and DuPont (DD) (-1.01%).
The S&P 500 ($SPX) rose 0.02 point, or 0.0%, and closed at 1,185.64. Top gainers in the S&P 500 included Coach (+11.92%), National Oilwell (NOV) (+8.46%), Carnival Corp. (CCL) (+6.37%), Northern Tr. (NTRS) (+5.31%), and Abercrombie & Fitch (ANF) (+4.82%). COH's gains came on the heels of their quarterly earnings report. Fiscal first-quarter profits were up 34% with gains of 63 cents a share, ahead of estimates. Lexmark Intl. (LXK) took a fall off 52-week highs, landing itself lower by 20.98% as the top decliner in the S&P 500 after its CEO Paul Curlander announced that he will be retiring in early 2011. Other top losers were Tellabs Inc. (TLAB) (-13.15%), Regions Financial (RF) (-7.82%), and Cabot Oil & Gas (COG) (-7.31%).
The Nasdaq Composite ($COMPX) ended the session higher by 6.44 points, or 0.26%, on Tuesday and it closed at 2,497.29. The top gainers in the Nasdaq-100 were Garmin Ltd. (GRMN) (+6.08%), Research In Motion (RIMM) (+5.88%), Seagate Tech. (STX) (+3.58%), and Foster Wheeler (FWLT) (+3.58%). GRMN shares rose following news of a new co-branding model with ASUSTeK Comp. The weakest stocks in the Nasdaq-100 were KLA-Tencor Corp. (KLAC) (-2.23%), Cintas Corp. (CTAS) (-2.18%), and Staples (SPLS) (-2.10%).
Broadcom (BRCM) will be one of the stocks to watch in Wednesday's session. It was up over 10% afterhours following a jump in fourth quarter guidance and record third-quarter earnings that easily topped analyst estimates. Other companies to watch out for will be Comcast (CMCSA), Procter & Gamble (PG), ConocoPhillips (COP), and Sprint (S). They all post earnings ahead of the bell. The housing data also continues with the MBA mortgage application and new home sales data. The other U.S. economic data for the day include durable goods, oil inventories, and the 5-yr note auction.
Although the index futures were higher afterhours, they peaked around 20:20 ET and quickly saw a gain in the downside momentum. Heading into midnight, the ES is already back at the afternoon lows. The lower end of the daily trading channel will serve as support, but price action comparable to last April is very possible. It will likely be the end of earnings season and the upcoming elections that provide a clear breakout from this channel and risk for swingtraders will remain higher as both draw near since many market participants will continue to move to the sidelines until after the election results.
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.