Market Giveth and Market Taketh Away
Good day! Monday was a give and take day for the markets. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all firmly tested their 20-day moving averages in Friday's session on strong selling. This has been a key buying point for the bulls over the past several months, but they have been getting nervous over the last week. Earnings season is slowing down and there isn't a lot of good news to latch onto. The index futures struggled on Sunday and early Monday morning to pull higher and continue to recover off Friday's lows, but the slow pace of the recovery made it easy for the bears to drive prices lower any chance they got. As shown on the 15 minute chart of the Nasdaq-100 E-minis (NQ, Figure 3), gradual trend moves on the upside that lasted for hours easily gave up their gains in less time.
Dow Jones Industrial Average
The most pronounced selloff in the futures market on Friday morning took place soon after the opening bell. Index prices were rounding off at highs in premarket trade, creating Momentum Reversals on the 15 minute time frame. Resistance hit within 15 minutes of the opening bell and the sellers jumped swiftly on board, driving prices lower to close the opening gap in less than 30 minutes. This wiped out gains in the Nasdaq that took six hours to obtain in the first place. Amazon.com (AMZN) was a key player in the Nasdaq's selloff. Wal-Mart (WMT) disappointed Amazon shareholders, but pleased consumers when it announced that it will offer free shipping on thousands of its online products for the holiday season, putting pressure on Amazon to compete.
Even though the market recovered from the early selloff, the recovery could not match the pace of the decline. In order to mount a strong recovery following a stronger-than-average drop, the pace of the selling typically has to slow before allowing real buying to come in. This would be similar to the slowing upside momentum in the Nasdaq between 5:00 a.m. ET and 9:30 a.m. ET that allowed strong selling to take over despite a rapid rally at 4:00 a.m.
Since it was the weakest performer, the Nasdaq had the most difficult time pushing higher into mid-day. The S&P 500 and Dow Jones Ind. Average continued the trend from Friday afternoon, but the overall pace remained slower than Friday morning's descent. By 14:00 ET the pace of the buying was also slowing and the correction period helped kick off another wave of strong downside that trended smoothly lower into the closing bell. All three of the major indices ended the session under their morning lows and that weakness continued to plague afterhours' trade as well, albeit at a slower rate of change.
Although the pace of the selling has slowed in the early-morning hours heading into Tuesday's session, all three of the major indices are now trading under their 20-day morning averages, hence putting pressure on the bulls. Typically, the rounded lows we are seeing in premarket trade will lead to an upside correction. The break in key technical support, however, will cause a lot of added concern and keep the bulls on edge.
The Dow Jones Industrial Average ($DJI) had a gain of 9.39 points, or 0.08%, and closed at 11,201.97 on Monday. Just under half of the Dow's 30 index components posted a gain for the session. The leaders were JPMorgan Chase (JPM) (+1.2%), Caterpillar Inc. (CAT) (+1.0%), Travelers Companies Inc. (TRV) (+0.8%), and Boeing (BA) (+0.8%). The top decliners were General Electric (GE) (-2.1%), Walt Disney (DIS) (-1.3%), Hewlett Packard (HPQ) (-1.3%), and International Business Machines Corp. (IBM) (-1.2%).
The S&P 500 ($SPX) fell 1.46 points, or 0.12%, and closed at 1,197.75. The top percent gainers in the index were Fortune Brands Inc. (FO) (+5.8%), Eastman Kodak (+4.3%), Eastman Kodak (EK) (+3.5%), and GameStop (GME) (+2.9%). The top percentage losers were PulteGroup Inc. (PHM) (-5.5%), Akamai Technologies (AKAM) (-5.1%), Sprint Nextel Corp. (S) (-5.0%), and Hartford Financial Services Group (HIG) (-4.8%).
The Nasdaq Composite ($COMPX) ended the session lower by 4.39 points, or 0.17%, on Monday and it closed at 2,513.82. Joy Global (JOYG) (+7.45%) was the best performer in the Nasdaq-100. It was followed by Warner Chilcott (WCRX) (+3.66%), Vertex Pharmaceuticals (VRTX) (+2.34%), and Maxim Integrated Prods. (MXIM) (+2.30%). Amazon.com (AMZN) (-4.09%) was the weakest performer amongst the Nasdaq's top 100 companies. It was followed by large losses in Expedia Inc. (EXPE) (-3.15%), Sears Holdings Corp. (SHLD) (-2.14%), and Marvell Technology Group (MRVL) (-2.02%)
Monday's retail sales data was a lot stronger than analysts had anticipated. Retail sales were up 1.2% in October, compared to estimates of a 0.6%-0.7% gain. This was the largest gain in seven months. Excluding autos, retail sales were up 0.4%. This data came ahead of a slew of retail earnings reports for the week. Nordstrom (JWN) disappointed investors following the close, however, when it reported an increase in profits, but poor outlet sales. Others to watch for include WalMart (WMT), Saks (SKS), and Lowe's (LOW) before Tuesday's open and Target (TGT) on Wednesday.
Note: Unless otherwise stated, the index action described below 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.
Note: This will be my last daily column for this week since I'll be heading to the Las Vegas where I'll be teaching a workshop on trade diversification at the Online Trading Expo on Friday from 5:30-6:30 pm. For more information, go to http://tiny.cc/ezsp5. I look forward to seeing you there!
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.