Good day! After giving back all of its early-morning gains on Monday to ended the session relatively unchanged, the index futures slowly built momentum on the upside in overnight trade heading into Tuesday's widely followed mid-term elections in the U.S.
Starting with the technicals heading into Tuesday, the rally began in the final hour of trade on Monday when the market reaction to strong support levels on the 15 minute time frame, such as the Nasdaq's 15 minute 200 period moving average. A base along highs afterhours then gave way to further buying in the futures after 19:00 ET. The indices stepped higher throughout the evening and early morning hours, gaining momentum on a premarket breakout into 7:30 a.m. ET. The increase in momentum ahead of the opening bell helped the indices hold onto the gains throughout Tuesday's session, but intraday activity was limited.
Dow Jones Industrial Average (Figure 1)
Despite its gains, the U.S. market spent the majority of its intraday trading action stuck in a range with even more limited moves overall than the market experienced on Friday. The premarket rally continues slightly into the opening bell, but the channel broke lower on the 5 minute time frame coming out of 10:00 a.m. ET. The pace of the selloff was average, creating an inverted-V into 10:30 ET. This made it more probable that the market would trade in a range throughout the remainder of the morning.
The morning lows took place at 10:30 a.m. ET and reacted to strong support at the 5 minute 20 period moving average intraday and the 15 minute 20 period moving average on the all-sessions charts, which include afterhours and premarket trade. After popping slightly, the indices traded in a range until shortly after 12:30 ET. This trading range included two waves of correction off the upper end of the range. The 5 minute time frame was very similar to an inverted version of Monday's mid-day range. Since it was flipped this time, however, the strategy was a bullish one. It triggered around 12:15 ET and the indices easily returned to the zone of morning highs, hitting the typical equal move target. This is shown in blue on each of the 5 minute charts.
S&P 500 (Figure 2)
The S&P 500 and Nasdaq were able to push to slightly higher highs in the afternoon than in the morning with a small continuation pattern out of 13:30 ET, but the overall pace was slowing. The 14:00 ET correction period held and the market fell into a gradual pullback into the closing bell. The action was tricky, however, and the best setup took place in the weaker Dow coming out of a 5 minute Avalanche™. This formed heading into 15:30 ET as the index reacted to 5 minute 20 sma resistance. The index fell back to intraday lows heading into the closing bell, whereas the S&P 500 and Nasdaq remained in the upper half of their intraday ranges.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) posted a gain of 64.10 points, or 0.58%, and closed at 11,188.72 on Tuesday. Only seven of the Dow's thirty index components posted a loss on the day. The top performers were Home Depot (HD) (+2.61%), American Express (AXP) (+2.00%), Microsoft (MSFT) (+1.63%), and Alcoa (AA) (+1.46%). The weakest included JP Morgan (JPM) (-1.23%), Intel (INTC) (-1.12%), Boeing (BA) (-0.99%), and Pfizer (PFE) (-0.96%).
The S&P 500 ($SPX) rose 9.19 points, or 0.78%, and closed at 1,193.57. Harmin Intl. (HAR) (+12.25%) was the leader in the index on Tuesday. It was followed closely by a 10.75% gain in Medco Health Solutions (MHS) and a 9.29% gain in Vulcan Materials (VMC). The weakest were Archer Daniels Midland (ADM) (-6.59%), Carfusion Corp. (CFN) (-5.61%), and Marathon Oil (MRO) (-5.30%).
The Nasdaq Composite ($COMPX) ended the session higher by 28.68 points, or 1.14%, on Tuesday and it closed at 2,533.52. Express Scripts (ESRX) (+6.30%), Wynn Resorts (WYNN) (+3.03%), Adobe (ADBE) (+2.83%), and Mattel Inc. (MAT) (+2.82%) were the strongest stocks in the Nasdaq-100. Vertex Pharmaceuticals (VRTX) (-1.77%), Intel (INTC) (-1.12%), and Garmin Ltd. (GRMN) (-1.02%) were the weakest performers.
Tuesday's uptrend continued afterhours with a push higher following the closing bell and another upper level trading range breakout at 19:00 ET. By the time the election results began to trickle in from the East, however, the bears were already testing the lower end of the all-sessions trading channel. This channel broke slightly before the end of the day, but a minor Momentum Reversal formed at the lower end of the range that helped the index futures end Tuesday at levels higher than those trading into the closing bell. So, even though by midnight the Republican takeover of the House of Representatives was viewed as a "done deal", the reaction is muted so far.
Many are watching for a "sell the news" type of reaction following Tuesday's results, and the market can indeed shape up for an early-morning selloff, but the battery of news hitting the wires this week is far from over. The FOMC will be entering day 2 of its two-day meeting on Wednesday and market participants are anxiously awaiting what they hope will be solid news on what it has in store for further quantitative easing (QE) to help boost the economy. The FOMC interest rate announcement will come at approximately 14:15 ET, but interest rates are expected to remain unchanged.
To quote yesterday's outlook, which remains unchanged: "The September-October rally in the U.S. markets has been proceeding remarkably well, but the pace of the rally has been slowing as the Dow and S&Ps test April's highs. The S&P 500 is the weakest of the three indices and still has a little more room before it firmly hits the April highs at 1,219.80, but pushing through it without a weekly correction will be very difficult."
Even as we move past election results and news from the Fed, the market will still be faced with the lated employment data later in the week and earnings season is ongoing. This will continue to keep us on our toes, but I still believe that as these wind down, we will finally see that weekly correction we've been waiting for.
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.