E-mini technicals draw buyers but are near edge

Good day! The bulls have been bruised, but not beaten over the past several days. After a period of congestion following Wednesday's late-day rally, which carried over into Thursday of last week, the market fell under pressure, giving back a chunk of those gains on a strong trend day lower this Tuesday. That selling continued into Wednesday's opening bell. It didn't ease completely until 10:30 a.m. ET. At that point the major indices hit strong support. This came in the form of their 10 day morning averages, as well as their 15 minute 200 period moving averages. This was also when the latest crude oil inventories came out.

Dow Jones Industrial Average (Figure 1)



As far as U.S. economic data goes, it was a slow day for the markets. The initial weekly jobless claims were released a day early due to Veterans Day on Thursday. They showed a 24,000 decline in claims to a seasonally adjusted 435,000. The four-week moving average fell to 446,500, which is the lowest it has been in two years. The immediate reaction was a rally in the index futures, but it was short-lived and selling pressure began to creep in ahead of the opening bell. Then at 10:30 a.m. ET the government reported a smaller-than-expected oil inventory, which led to an increase in crude oil prices that lasted throughout the remainder of the session. Crude oil settled up $1.09 a barrel at $87.81, while the U.S. dollar fell back. The market, however, also took this positively and it kicked off an uptrend that lasted into the closing bell.

The type of price action heading into the session's lows on Wednesday also helped facilitate the intraday reversal. Even through the selloff was sharp to begin with, the pace of the selling shifted dramatically into the lows. Lower lows created trap scenarios and the market rounded off with slightly lower lows and then slightly higher ones on a 2 minute time frame. This type of rounding is a positive development for the bulls. The fact that is was coupled with major support didn't hurt!

Many have been looking for "buying opportunities" in this market and retracements to the 10 day and 20 day moving averages are typical levels to watch for buyers to come in. These levels start to become a concern, however, when the indices begin to hug them tightly and they are constantly retested day after day. This increases the risk that they will break down, and that the breakdown will be a rapid and steep one. Although we never got such a trigger in October, the selloffs into May and again in August were two examples of this type of action.

S&P 500 (Figure 2)



The Dow Jones Industrial Average ($DJI) had a gain of 10.29 points, or 0.09%, and closed at 11,357.04 on Wednesday. Bank of America (BAC) was the best performer in the Dow. It ended the session higher by 2.4%. The other top gainers included Chevron Corp. (CVX) (+1.9%), JP Morgan Chase (JPM) (+1.8%), and 3M (MMM) (+1.1%). The weakest stocks in the Dow were Boeing (BA) (-3.1%), WalMart (WMT) (-1.0%), and Pfizer (PFE) (-0.9%). BA's dramatic drop followed news that a test flight for a 787 Dreamliner was forced to make an emergency landing.

The S&P 500 ($SPX) rose 5.31 points, or 0.44%, and closed at 1,218.71. The top percentage gainers in the index were Polo Ralph Lauren (RL) (+7.3%), Halliburton (HAL) (+5.0%), Harman Intl. Ind. (HAR) (+4.9%), and Denbury Resources (DNR) (+4.9%). RL reported a 16% increase in earnings and a strong outlook, while HAL announced that it plans to increase capital spending next year and is targeting new markets outside the U.S. The top percentage losers were Assurant Inc. (AIZ) (-11.2%), Dean Foods (DF) (-9.8%), Invesco Ltd. (IVZ) (-3.9%), and Campbell Soup Co. (CPB) (-3.3%).

The Nasdaq Composite ($COMPX) ended the session higher by 15.80 points, or 0.62%, on Wednesday and it closed at 2,578.78. The top gainers in the Nasdaq-100 were Research In Motion (RIMM) (+6.3%), Citrix Systems (CTXS) (+2.7%), Foster Wheeler (FWLT) (+2.7%), and Biogen Idec. (BIIB) (+2.5%). The weakest stocks were Logitech Intl. (LOGI) (-4.7%), Warner Chilcott (WCRX) (-2.4%), Lam Research (LRCX) (-1.7%), and Seagate Tech. (STX) (-1.6%).

Nasdaq Composite (Figure 3)



Although the trend from 10:30 a.m. ET onward was a steady one on Wednesday, the momentum of the trend weakened as the afternoon wore on. The rally off the morning lows lasted until noon. This is a strong correction period and the market fell into a level of congestion. Unfortunately, in order to correct adequately to the morning rally, the indices should have held that congestion until the second half of the afternoon before attempting to continue higher if it wished to match the morning move. Instead, it attempted to break higher out of the 13:00 ET correction period. The result was an early Phoenix (TM) on the 15 minute time frame and a barely higher high on the day. The attempt was repeated once again out of the 14:00 ET correction period, but was met with even less success. It created a shift in momentum once again that left a market of caution on the market heading into the final 90 minutes of trade.

Although the indices held onto their gains into the closing bell, Cisco (CSCO) was the "straw that broke the camel's back". Index futures fell hard following Wednesday's closing bell after Cisco reported earnings. Although Cisco (CSCO) has a very strong fiscal first quarter with revenue up 19.2%, it slashed its outlook in favor of an anticipated gain in second-quarter revenue of 3-5%. The Nasdaq futures were hit the hardest and broke through Wednesday's morning lows before finding support. A larger daily correction in the markets is beginning to take shape. This is the third correction on a 60-minute time frame in the Nasdaq and there are three clear daily highs now on the Nasdaq. Although the buying pace remains stronger-than-average, I expect to see that slow over the next several weeks. The Nasdaq is currently teasing the zone of the 2007 highs.

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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