E-minis sell election news then buy on Fed

Good day! Wednesday was a very busy day for the markets in the U.S., which were hit by news from multiple fronts. It began with the reaction to Tuesday's mid-term elections. The Republicans easily took over the House of Representatives and the futures market began to sell the news even before the results were in. The index futures hit a third high on the 15 minute time frame on Tuesday heading into 20:00 ET, which left the trend extended heading into the evening's tally. The futures fell quickly to the lower end of the trend channel that began on Monday afternoon and fell into a period of congestion heading into midnight, which left the overall intraday bias in favor of those entrenched strongly in the "sell the news" mentality.

Dow Jones Industrial Average (Figure 1)

Although there were several economic reports released early on Wednesday morning, they did not have an immediate impact upon the day's price action. According to the ADP National Employment Report, there was a 43,000 gain in private sector jobs in October, while September's numbers were revised to reflect a 2,000 loss. The original figure showed a 39,000 loss, so the revision was a favorable one. Nevertheless, planned layoffs did edge higher in October. The more influential employment data will be the government's nonfarm payrolls report for October that will be coming out ahead of Friday's open. Economists are anticipating an increase of approximately 60,000 jobs.

In other premarket news from Wednesday, the Mortgage Bankers Association reported that U.S. mortgage applications for both purchase and refinancing dropped 5% last week. The four-week moving average remains barely positive, up 0.1%.

The 10:00 a.m. ET data did not result in a directional bias for the market activity intraday either. The Commerce Department reported that U.S. factory orders rose 2.1% in September, which was the largest gain in eight months and stronger than expected. The downside, however, was that orders for non-defense capital goods (excluding aircraft) were down 0.2% after rising 5.1% in August. This can be read as an indication of diminished business confidence.

Meanwhile, the Institute for Supply Management's non-manufacturing index rose to 54.2 with the 10th consecutive month of growth. Estimates had placed it 53.2.

When viewed intraday on Wednesday only, the morning's price action may not have appeared that worrisome to the outside observer. The indices spent the first hour of the day in positive, or at least relatively unchanged, territory. The levels would have been much higher, however, if the premarket pullback had not taken back the afterhours gains from the night before. This meant that the congestion out of the opening bell was actually a low-level base when viewed on the all-sessions charts and compared to the premarket data. This congestion was hugging the lower end of a trading channel on that time frame. When viewed on just the intraday time frames over multiple days, the bias was also still favoring the bears. On the 15 minute charts the price action hugged the 20 period moving average after falling from Tuesday's afternoon highs. This is particularly evident on the 15 minute chart of the Nasdaq e-Mini and created an Avalanche(TM) short pattern that triggered into the 10:45 ET correction period.

S&P 500 (Figure 2)



The Avalanche(TM) gave the "sell the news" players something to latch onto. The setup was clean-cut and the downside was smooth. A continuation pattern took place around 11:00 a.m. ET and took the indices into their 5 minute 200 period moving averages intraday for support. It the market had held this level over noon, then the odds would have also been high for a breakdown in the first half of the afternoon. Instead, the market flushed lower into noon and then pulled back up into the mid-day range. This meant that a longer base would be necessary to establish a stronger continuation move, meaning that it would not be likely to occur prior to the 14:15 ET FOMC meeting announcement. In fact, the indices even attempted a reverse Head & Shoulders setup on the 5 minute time frame, triggering a sloppy Phoenix(TM) around 13:45 ET. This was not a favorable time of the day to place positions, however, with a presidential news conference underway and the anticipation of the Fed announcement on the nearby horizon.

Nasdaq Composite (Figure 3)

The initial reaction to the Fed's news was very mixed. The focus not upon whether or not the Fed would change its interest rates (which it didn't), nor even upon whether or not it would change its wording of "extended period" in relation to how long it planned on keeping rates low (it didn't). The focus was instead upon what announcement the Fed would make with regard to the highly-anticipated implementation of a second wave of quantitative easing by purchasing long-term Treasurys to pump money into the economy, keep interest rates low, and ideally combat deflation.

Analysts were estimating that the Fed would commit to a total of $500 billion to $1 trillion. They settled upon $600 billion at a pace of $75 billion a month. The market initially took a negative stance on this news. The indices typical form three waves of reaction following a Fed announcement. Although the focus was dramatically different than past announcements, the market did still follow this guideline... at least initially. The market sold off on the news, flushing rapidly lower to trigger a bear flag on the 15 minute time frame, but it quickly whip-awed back to the day's highs. It is fairly common to experience a secondary reaction that is stronger than the first, but prices typically revert back to the initial bias. This took place heading into 14:30 ET and the market hit a new low on the day.

This bearish bias, however, did not hold. The gap closure in the S&P 500 at that point served as support, along with the 20 day moving average once again in the S&P 500 and Dow Jones Ind. Average and the 10 day sma in the Nasdaq. The market reacted strongly to this support zone and held onto the reversal into the closing bell. A secondary upside move off the day's lows began 20 minutes prior to the closing bell and continued into afterhours trade. This late-day recovery took both the Dow and the Nasdaq to new 2-year highs.

The Dow Jones Industrial Average ($DJI) posted a loss of 64.10 points, or 0.58%, and closed at 11,188.72 on Wednesday. The Dow's top percentage gainers were Cisco (CSCO) (+2.3%), Hewlett-Packard (HPQ) (+2.1%), JP Morgan (JPM (+2.1%), Intel (INTC) (+1.5%), and Bank of America (BAC) (+1.1%). Despite the overall index gains, nearly a third of the Dow's 30 index components still posted a loss. The top percentage losers were Microsoft (MSFT) (-1.3%), Kraft Foods (KFT) (-0.8%), DuPont (-0.8%), and American Express (AXP) (-0.8%).

The S&P 500 ($SPX) fell 9.19 points, or 0.78%, and closed at 1,193.57. The S&P 500's top percentage gainers were Hartford Financial Services Group (HIG) (+9.2%), Marshall & Ilsley Corp. (MI) (+5.6%), Ford Motor Co. (F) (+4.9%), and First Horizon National Corp. (FHN) (+4.9%). Ford (F) had reported a 19.2% increase in sales in October, which boosted shares. The worst performers were Quanta Services Inc. (PWR) (-10%), EOG Resources (EOG) (-9.3%), PulteGroup Inc. (PHM) (-7.7%), and Electronic Arts (ERTS) (-4.3%).

The Nasdaq Composite ($COMPX) ended the session lower by 28.68 points, or 1.14%, on Wednesday and it closed at 2,533.52. In the Nasdaq-100, the top gainers were Urban Outfitters (URBN) (+4.0%), Amazon.com (AMZN) (+2.3%), Cisco (CSCO) (+2.3%) and Illumina Inc. (ILMN) (+2.1%). The weakest were Garmin Ltd (GRMN) (-5.3%), Electronic Arts (ERTS) (-4.3%), and Symantec Corp. (SYMC) (-2%).

Wednesday's outcome leaves the market still open for a retest of prior highs in the S&P 500. It also leaves the Nasdaq within reach of its 2007 highs. These price levels will be extremely difficult to break without a weekly to monthly correction, however, so use caution. The market has been in rally mode for over two months. This is a typical run in the market and even in the 2009 rally we saw periods of congestion following moves over a similar period of time. Even though this does mean it is necessary to be more cautious on new longs, we are not seeing any confirmation of a correction just yet, so it's best to continue to stick to only short-term plays when going against the trend, or focus on securities that are not moving in accordance with the overall market until we see a greater shift in the pace of the buying. Although it has slowed compared to September, it still remains stronger-than-average.

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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