Good day! The market action on Thursday was rather uneventful. The action over the past week has shown us that many participants have started to move to the sidelines ahead of next week's FOMC meeting and mid-term elections. Volume has dropped off and the indices have remained confined to the larger daily trading channel with strong reactions to both ends of the channel's price spectrum.
Dow Jones Industrial Average (Figure 1)
The latest employment data came out ahead of the opening bell from the Labor Department. Last week's initial claims for state unemployment benefits fell to their lowest level since early July. Initial claims were down 21,000 to 434,000. The main event: October's jobless report, is due out next week and help liven up the markets.
Although the index futures were creeping higher overnight, they gave way to strong selling out of the opening bell on Thursday. Strong price resistance, along with a slowdown in the momentum of the trend between Wednesday's close and Thursday's open helped the reversal gain steam. it wasn't until the 10:15 ET correction period, however, that the bears really gained power.
When an early-morning trading range gave way, selling hit hard. The morning gaps quickly closed and the indices fell sharply into 15 minute 20 sma support. This stalled the selling briefly, but a second wave took place heading into noon before the indices held more solid support. Two wave corrections are common in the markets and the slowdown in the selling pace on the second wave on Thursday into 13:00 ET helped the indices hold up for the remainder of the day. After the buy trigger at 13:00 ET, however, the remainder of the session was choppy and more difficult to trade. Buyers came in again at 14:00 ET, but lacked conviction and the selloff that began final minutes prior to the closing bell continued throughout the remainder of the evening.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) posted a loss of 12.33 points, or 0.11%, and closed at 11,113.95 on Thursday. Although the gains were nearly non-existent in the index overall, nearly 2/3 of the Dow's 30 index components did close in positive territory. The leaders included Pfizer (PFE) (+1.68%), Disney (DIS) (+1.64%), Intel (INTC) (+1.39%), American Express (AXP) (+1.33%), and Merck (MRK) (+1.32%). The biggest drag on the Dow was 3M. It fell 5.86% despite posting earnings that beat expectations. Their outlook, however, was disappointing. The other losers in the Dow followed distantly. Caterpillar (CAT) was the second-biggest loser with a loss of 0.61%.
The S&P 500 ($SPX) rose 1.33 point, or 0.11%, and closed at 1,183.78. Eastman Kodak (EK) topped the S&P 500 with a gain of 15.37% after it beat its earnings forecast. LSI corporation followed with a gain of 7.38%, while F M C Corp. (FMC) climbed 6.48% and Ameriprise Finl. (AMP) rose 5.07%. Flowserve Corp. (FLS) was the biggest loser in the S&P 500. It fell 12.19% and was followed closely with an 11.42% loss in JDS Uniphase (JDSU). Goodyear Tire (GT) (-9.04%) and Halliburton (HAL) (-7.96%) were also top decliners. HAL fell apart mid-day after a report was released that indicated the cement used by the company may have contributed to the BP oil spill disaster in the Gulf of Mexico.
The Nasdaq Composite ($COMPX) ended the session higher by 4.11 points, or 0.16%, on Thursday and it closed at 2,507.37. Flextronics Intl. (FLEX) (+11.09%) was the strongest performer in the Nasdaq-100, followed by O Reilly Automotive (ORLY) (+5%), Symantec (SYMC) (+4.11%), and Vodafone (VOD) (+3.51%). Seagate Tech. (STX) (-8.41%), Dentsply Int. (XRAY) (-5.49%), and KLA-Tencor (KLAC (-2.95%) were the weakest.
Nasdaq Composite (Figure 3)
With nearly all eyes ahead towards next week, the main market movers on Friday will be the reactions to the latest earnings reports. Microsoft wowed investors with a 51% increase in net income and earnings per share up 55% in its fiscal first quarter. Those to watch on Friday morning will include Chevron (CVX), Merck (MRK) and Cigna (CI). The lates GDP data, Chicago PMI, and consumer sentiment are also still to come this week.
Price action in the indices is continuing to resemble the action from last April. The slowdown in buying, narrow trading range, and strong price resistance are all going to weigh heavily on the bulls. Expect volatility to increase substantially next week with the help of the elections, Fed meeting, earnings, and jobs data. It will also be a riskier trading environment, particularly heading into and immediately following the major news releases. There are a lot of unknowns keeping investors at bay. Although the Republicans are expected to regain control of the House of Representatives, it's not a done deal. Nor are the Feds plans for how it intends to provide another boost to the economy.
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.