E-minis trade against lower channel, but don't break

Good day! The market remained firmly entrenched within its larger daily trading channel on Wednesday despite another bout of strong morning selling. The weakness began late Tuesday evening and the index futures were already testing Tuesday's lows heading into midnight. This did serve as some initial support for the futures going into the early morning hours on Wednesday, but the bearish bias on the 30 minute time frame did not end there. After hitting the upper end of the daily channel on Monday, the indices had turned lower with the 20 day moving average in the Dow and S&Ps serving as a magnet for the correction.

The indices were once again somewhat divided as the session began due to strength in Broadcom (BRCM) following earnings. This helped the Nasdaq outperform the S&P 500 and Dow Jones Ind. Average, although the intraday swings themselves were in tandem. The indices all gapped lower into the opening bell, but the Nasdaq easily closed the morning gap with buying right out of the open. The Dow had a more difficult time. Although it hit strong price support from Tuesday's lows at the open, it merely hugged this support and corrected to it over time instead of through price. This is bearish price action. Volume dropped as the Nasdaq and S&Ps moved higher, signaling uncertainty by the bulls. That uncertainty gave way to strong selling once the 10:00 a.m. ET economic data hit the wires.

Dow Jones Industrial Average (Figure 1)



The Commerce Department reported that new orders for manufactured durable goods increased 3.3% to $6.3 billion in September. This was greater than the 1.8% increase analysts expected, but when transportation was excluded then orders were lower by 0.8%. This was worst than anticipated. In other news, sales on new single-family homes were up 6.6% in September. This was better than anticipated, but the market was not relieved. The foreclosure crisis remains in the forefront of media attention and most are expecting the housing recovery to take at least several years.

The 10:00 a.m. ET selloff first hit support shortly before 10:30 ET and then formed a continuation pattern into 11:00 ET. At that point the S&Ps and Dow were back at their 20 day moving averages, which have served as support since the beginning of the September rally. This is the lower end of the daily trading channel and the support zone pointed out in yesterday's column. It held extremely well, but the pace of the selling meant that a shift in momentum was necessary to sustain a stronger price recovery off the support zone. This took place between noon and 14:00 ET. All three of the major indices went for a slower retest of morning lows in the early afternoon.This shift in the pace of the selling allowed the market to turn higher and regain most of the session's losses before the closing bell. The Nasdaq even made its way back to Tuesday's afterhours highs and posted a gain.

S&P 500 (Figure 2)



The Dow Jones Industrial Average ($DJI) posted a loss of 43.18 points, or 0.39%, and closed at 11,126.28 on Wednesday. Just under a third of the Dow's 30 index components managed to post a gain for the day. The biggest winners were the financials. They included a 2.12% gain in Bank of America (BAC), a 1.45% gain in American Express (AXP) (+1.45%), and a 0.91% gain in JP Morgan (JPM). The weakest performers were Merck (MRK) (-1.65%), McDonalds (MCD) (-1.63%), Alcoa (AA) (-1.32%), and Hewlett Packard (HPQ) (-1.30%).

The S&P 500 ($SPX) fell 3.19 point, or 0.27%, and closed at 1,182.45. Broadcom (BRCM) wowed the market following a jump in fourth quarter guidance and record third-quarter earnings that easily topped analyst estimates. It was the top performer in the S&P 500 with a gain of 11.66%. Devry Inc. (DV) (+7.04%), ProLogis (PLD) (+5.41%), and Life Technologies (LIFE) (+6.07%) were additional S&P leaders. Sprint Nextel (S) was at the other end of the spectrum following disappointing earnings. It ended the session lower by 9.85%. Other losers included Molex Inc. (MOLX) (-7.67%), UnitedHealth Group (UNH) (-4.37%), and Abercrombie & Fitch (ANF) (-4.17%).

The Nasdaq Composite ($COMPX) ended the session higher by 5.97 points, or 0.24%, on Wednesday and it closed at 2,503.26. Marvell Tech. (MRVL) (+6.80%) and Illumina Inc. (ILMN) (+6.31%) followed Broadcom (BRCM) (+11.66%) as the gainers in the Nasdaq-100. The weakest performers were Sears Holdings (SHLD) (-3.30%), Urban Outfitters (URBN) (-2.39%), and Fastenal Co. (FAST) (-2.27%).

Nasdaq Composite (Figure 3)



News to watch on Thursday include the weekly initial jobless claims report and earnings from 3M (MMM), Exxon Mobil (XOM), Microsoft (MSFT), and Royal Dutch Shell (RDS.A). I'm expecting the market to remain on edge for the rest of the week and continue to be susceptible to rapid intraday drops. This is a market that is easily whipped around by the news of the day and the news is just starting to get geared up. The elections in the U.S., the Fed meeting, and a constant stream of third-quarter earnings will be dominating the headlines over the coming week and this should translate into a break of the daily trading channel. Right now the bias is for a downward break, but the momentum needs to round off more at highs to offer a stronger confirmation of that bias, so it's not a great time to be too aggressive. Use a great deal of caution particularly on new overnight positions at this time since any gains could be rapidly eroded when the channel does break.

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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