E-mini traders prepare for busy week

Good day! Although not as strong as September, the market performed well in October. All three of the major indices logged gains over 3%, but the price action left traders on edge. The uptrend channel has become more choppy in recent weeks with the 20 day moving average serving as support for the Dow Jones Ind. Ave. and S&P 500 and the 10 day moving average serving as support in the stronger Nasdaq. These levels are being tested more frequently as investors and traders alike have started to hold back ahead of this week's busy economic schedule.

In the line-up for this week includes Tuesday's mid-term elections, Wednesday's FOMC meeting, Friday's employment data, and another round of quarterly earnings.

Dow Jones Industrial Average (Figure 1)

Although it is far from certain, the Republicans are being widely hailed as likely to retake the majority in the House of Representatives in Tuesday's election. As such, it is likely already built into the current price action in the markets, but it is viewed as a more bullish, or at least complacent, outcome than if the Democrats manage to maintain control.

The FOMC statement will quickly follow Tuesday's election results on Wednesday afternoon. Although interest rates are expected to remain unchanged, previous announcement have been widely followed for the language of the accompanying statement, particularly the Fed's plans to keep rates lower for "an extended period." This time, however, the focus has shifted back to Fed intervention through the use of "quantitative easing" and market participants have been debating the extent of their intervention, and even whether or not the Fed will make any such announcement to accompany the interest rate statement. Recently expectations for intervention have been lowered and it seems unlikely that the Fed will offer any specific number. Instead, there is a higher chance that the Fed will start lower and increase the scale as it deems necessary over time.

As far as earnings season goes, so far 335 of the S&P 500 companies have reported. Out of those, 77% have beaten earnings estimates. The record for earnings was 79% beating estimates in the third quarter of 2009. Although earnings have been strong overall this year, the market sold off during the Q4 2009 earnings releases and following those for Q1 and Q2 of 2010. The market extension on the daily and weekly time frames this time around also leaves it vulnerable for another correction, although currently the overall upside momentum is stronger-than-average. This will typically make steep price reversals more difficult.

S&P 500 (Figure 2)



It will be important to be particularly vigilant this week and take care to stick to strict risk and money management. Although these are things that should always be minded when trading, the volatility this week will shake things up and there is the increased risk that the market will flush out stops placed on the books. Swingtraders will be particularly at risk for such action.

I am expecting Monday and Tuesday's sessions to be slower-than-average, similar to Friday. Friday's session was narrow and indecisive. Although technical triggers held well on the time frames under 5 minutes, the reward potential on strategies was lower-than-average and there was a greater degree of price overlap from one bar to the next. This meant that it was important to identify support and resistance levels ahead of time as entry and target triggers, because waiting for confirmation through the use of channel breaks and trailing stops dramatically impacted results. The index futures are trading higher off the daily support heading into Monday morning, but the upper end of the daily channel will remain resistance, along with April's highs in the S&P 500.

Nasdaq Composite (Figure 3)

The Dow Jones Industrial Average ($DJI) posted a gain of 4.54 points, or 0.04%, and closed at 11,118.49 on Friday. The top performers in the Dow were Alcoa (AA) (+3.87%), IBM (+1.92%), Microsoft (MSFT) (+1.48%), and Caterpillar (CAT) (+1.11%). On Thursday, MSFT surprised the market by posting strong profits and sales for its Windows and Office software, as well as the popular Halo video game. The company received a further boost thanks to raised price targets by several brokerages. The weakest components in the Dow were Chevron (CVX) (-2.18%), Intel (INTC) (-2.05%), Merck (MRK) (-1.71%), and Hewlett-Packard (HPQ) (-1.45%). The Dow ended the month of October higher by 3.1%.

The S&P 500 ($SPX) fell 0.52 point, or 0.04%, and closed at 1,183.26. Monster Worldwide (MWW) topped the S&P 500 with a gain of 25.50% after it reported that booking for Q3 were higher than expected, leading to a number of brokerages upping their price targets for the company. Estee Lauder Cos (EL) followed MWW with a gain of +10.50% after it beat earnings expectations for both profits and sales. United States Stl (X) (+5.56%) and Washington Post (WPO) (+5.35%) rounded off the top four gainers. Genworth Financial (GNW) was the biggest loser in the S&P 500. It fell 9.94% after being hit hard by losses in Florida as a result of its mortgage insurance services. First Solar (FSLR) (-8.91%), Sunoco (SUN) (-5.66%), and Office Depot (ODP) (-5.66%) were also big losers for the day. The S&P 500 ended October higher by 3.7%. The materials sector was the strongest sector in the market for the month, up 6.57%, followed closely by technology, up 6.45%.

The Nasdaq Composite ($COMPX) ended the session higher by 0.04 points, or 0.0%, on Friday and it closed at 2,507.41. Maxim Integrated Prod. (MXIM) (+10.17%), Seagate Technology (STX) (+5.52%), and Verisign (VRSN) (+3.89%) were the best performers in the Nasdaq-100. First Solar (FSLR) (-8.91%), Henry Schein Inc. (HSIC) (-4.21%), and Cognizant Technology Solutions (CTSH) (-2.96%) were the weakest. The Nasdaq Composite finished October with a gain of 5.9%.

Friday's economic data had very little impact upon the price action for the day. The Chicago Purchasing Managers' Index for October came in at 60.6, which was slightly higher than the 60.4 number that was anticipated. Meanwhile, U.S. GDP rose at a rate of 2% for the third quarter. This was in line with expectations, but the Q3 employment coast index rose slightly less than anticipated at 0.4%. The Reuters/University of Michigan's consumer price index was more disappointing. It fell from 68.2 in September to 67.2 in October. This is the lowest it has been in nearly a year. Personal income and spending, along with October's ISM index and September's construction spending will kick off the data this week on Monday morning.

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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