Good day! This week has been one that has been dominated by news and the price action has been driven by it as a result. Tuesday's anticipated takeover by the Republicans in the U.S. House of Representatives was expected to be good news for the bulls, but it was also already factored into the market's price action. As a result, Wednesday morning was hit with a round of selling. It wasn't long, however, before further developments began to turn things around. A catalyst for that turnaround was Wednesday's Fed announcement. Although typically this is followed for news on where the Fed intends to keep interest rates, this time the world was watching to see what kind of a stance it would take on quantitative easing. This highly anticipated move, designed to boost the economy, gave the markets a boost as well.
It took a few minutes to sink in, but investors expressed their approval with the Fed's decision to purchase $600 billion in Treasury bonds in $75 billion monthly increments spread out until next summer. This was near the lower end of the funds debated. The markets surged higher into the end of the session on Wednesday and followed through afterhours. The bulls were also pleased the hear that President Obama had expressed an interest in extending the Bush-era tax cuts for all income brackets.
Dow Jones Industrial Average (Figure 1)
After pushing higher with a second wave of post-Fed buying on Wednesday afternoon and early evening, the index futures fell into a narrow trading range that lasted into the early-morning hours. By hugging the highs of Wednesday's price action, however, the bias within the trading channel remained bullish. Upside momentum began to build within the range soon after 2:00 a.m. ET, but it was a push out of 4:00 a.m. on increased volume thanks to overseas markets that pushed the indices out of the range and to new highs on the week. Investors were greeted on Thursday morning with a strong gap higher into the opening bell.
The indices traded in a tight uptrend channel throughout October. Thursday's opening gap was also a type of breakaway gap. This is shown on the daily charts in this column. The opening prices for the major indices cleared the upper levels for the most recent segment of the uptrend, hence "breaking away" from the trend channel. This is a move that typically results in a strong trend in the indices on the morning of the gap as long as the gap is not more than approximately one average day's range in the indices.
S&P 500 (Figure 2)
The Dow was the leader intraday on Thursday morning, while the Nasdaq lagged. Although all three of the majors hit new highs, the Dow's trend intraday consisted of three solid waves of buying on the 2-5 minute time frames. This gave a clear-cut end to the trend move following the last leg of buying into 11:00 a.m. ET. The move took the S&P 500 back into the previously monthly highs discussed in yesterday's column and by the end of the day the index was trading at new 2-year highs, although this should not be interpreted as a break in this resistance "zone". The indices are extended heading into Friday's session, but the pace of the rally and afterhorus congestion on Thursday are still indications of strength and the Nasdaq still remains within reach of its 2007 highs. Right now the eyes will be on Friday's employment data, which will drive intraday price action into the weekend.
Nasdaq Composite (Figure 3)
By the end of the day on Thursday, the Dow Jones Industrial Average ($DJI) had a gain of 219.71 points, or 1.96%, and closed at 11,434.84. The top percentage gainers in the Dow were JPMorgan Chase and Co (JPM) (+5.5%), Bank of America (BAC) (+5.3%), Caterpillar Inc (+4.1%), and American Express (AXP) (+3.9%). The banks were cheered by afternoon news that the Fed will start to allow some banks to raise their dividends. Multinationals, on the other hand, were also pleased. The Fed's move pushed the U.S. dollar to an 11-month low, which increases the overseas profits for companies such as CAT. The only loser partially gave indication of the session's weak sectors, namely the drug makers. That loser was Pfizer (PFE) (-0.2%).
The S&P 500 ($SPX) rose 23.10 points, or 23.10%, and closed at 1,221.06. All of the S&Ps industry sectors were higher. The Fed's decision also drive oil prices higher as the dollar fell. Oil was up over 2% on Wednesday and energy was one the S&P's top-performing sectors. The top individual performer in the S&P 500 was Whole Foods Market Inc. (WFMI) (+15.1%). It jumped on strong quarterly earnings. New York Times (NYT) (+8.3%), D.R. Horton Inc. (DHI) (7.8%), and Freeport McMoRan Copper and Gold (FCX) (+7.0%) followed. The worst performers were Apollo Group (APOL) (-8.0%), Big Lots (BIG) (-6.8%), Expedia Inc. (EXPE) (-5.3%), and DIRECTV (DTV) (-3.6%).
The Nasdaq Composite ($COMPX) ended the session higher by 37.07 points, or 1.46%, on Thursday and it closed at 2,577.34. The strongest performers in the Nasdaq-100 were Sandisk (SNDK) (+5.91%), Qualcomm (QCOM) (+5.80%), First Wheeler (FWLT) (+5.77%), and Maxim Integrated Prods. (MXIM) (+5.51%). QCOM received a huge boost when the company reported that it not only had strong profits for the quarter, but that its yearly results would top previous expectations. This caused many firms to raise their price targets on the stock and it gapped sharply to new highs on the year. The gap itself was so large, however, that it was unable to generate further buying and closed off its intraday highs. In order to see a strong continuation on a gap, ideally a breakaway gap will be less than twice an average day's range. The weakest performers were Apollo (APOL) (-8.03%), Expedia Inc. (EXPE) (-5.27%), and Vertex Pharmaceuticals Inc. (VRTX) (-5.21%).
My outlook from yesterday's column holds true heading into the weekend. The S&Ps tested previous highs on the monthly time frame and the Nasdaq is attempting to as well, but these price levels will be extremely difficult to break without a weekly to monthly correction. 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. Since this "zone" of resistance is taking place on the monthly time frames, however, there is greater "wiggle room" than we would typically see at a level of intraday or daily resistance and reactions to them are not often as immediate as they appear on the smaller time frames.
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.