Good day! I hope everyone has been having a great week! I'm back from the Online Trading Expo in Las Vegas that took place this past weekend and am gearing up for the holidays! The week of Thanksgiving tends to be a pretty slow one for the markets, but this week has been quite active so far. The major indices had large intraday swings on both Monday and Tuesday. The primary bias remained bearish, but the indices are still holding onto the 50-day moving average zone that hit last week and served as support for the strong selloff that began on November 9th.
Dow Jones Industrial Average (Figure 1)
This indices fell sharply on Monday morning, triggering a short setup after Friday's slow recovery. They hit support mid-day when the Dow struck its 50-day moving average zone once again and the market climbed off the lows throughout the remainder of the day. The pace slowly turned over soon after the closing bell. The selling increased following news out of Korea that the escalating tensions in the region reached the point where artillery fire was exchanged once again on Tuesday. Earlier this month an American nuclear scientist reported that he had been shown a facility that was built to enrich uranium in the pursuit of nuclear weapons.
Troubles abroad have meant a return of strength in the U.S. dollar and a decline in the price of oil. I first touched upon the topic of extension in the U.S. dollar back in October. At that time, the EUR/USD caught my eye because the rally that took place in September and into mid-October was comparable to the one that began in June and lasted into early August. The price level hitting at the time also corresponded to congestion from December and early January. This made it likely that there would at least be a period of congestion to form some sort of correction off resistance this fall. By establishing a slightly higher high in early November, however, a type of bull trap was formed, which allowed the selling pace to increase in comparison to the congestive-type of correction that began in October. This correlation is inversed in the U.S. Dollar Index (DXY), whereby a slightly lower low created a bear trap.
In addition to the U.S. dollar, gold was also once again on the rise on Tuesday. The upside began after striking 50-day sma support last week, but a smaller trading range on the 60-minute time frame broke higher on Monday afternoon with the buying continuing into Tuesday morning.
S&P 500 (Figure 2)
Although turmoil overseas has been grabbing a lot of the headlines, the news out of the U.S. was far from cheery. The Federal Reserve lowered its outlook for growth in the U.S. through next year, anticipating an unemployment rate between 9.1% and 9.7%. Its 2010 gross domestic product outlook fell, indicating an anticipated growth of 2.4-2.5%, compared to earlier projections between 3-3.5%. In housing news, existing home sales were down 2.2% in October to a seasonally adjusted annual rate of 4.43 million, according to the National Association of Realtors. This was worse-than-expected.
Wednesday will be a busy day for data thanks to the shortened trading week due to the Thanksgiving holiday in the States. It will include initial jobless claims, durable goods orders, consumer sentiment, new home sales, and crude oil inventories. The U.S. exchanges will be closed on Thursday, followed by an early close on Friday. Price action is looking to remain weak heading into the holiday, but the 50-day sma zone continues to be a support zone to keep an eye on. Volume will start to drop off on Wednesday, particularly after 11:00 a.m. ET and will remain light until traders start to return on Monday. Technical levels tend to hold well in holiday sessions, but lighter trade and narrower intraday ranges can hinder profit potential. I'll be limiting my risk exposure with a family trip out of town, and will rejoin the action on Monday as well!
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 142.21 points, or 1.27%, and closed at 11,036.37 on Tuesday. Hewlett-Packard (HPQ) was the only component in the Dow that managed to post a gain. It was up 2.17% after reporting fiscal fourth quarter earnings. It boosted investor interest after it also raised its fiscal 2011 outlook. The weakest performers were Microsoft (MSFT) (-2.37%), JPMorgan Chase (JPM) (-2.29%), Disney (DIS) (-2.25%), Merck (MRK) (-2.19%), and Chevron Corp. (CVX) (-2.04%).
The S&P 500 ($SPX) fell 17.11 points, or 1.43%, and closed at 1,180.73. Big Lots (BIG) was the top S&P 500 performer, rising +5.28% after Buckingham Research rosed its rating from "neutral" to "buy". New York Times Co. (NYT) followed with a gain of 4.71%. Strength was also seen in CF Inds. Holdings (CF) (+2.94%), Hormel Foods (HRL) (+2.55%), and Monster Worldwide (MWW) (+2.41%). Airgas Inc. (ARG) was the weakest performer in the index (-5.92%), followed by Nabors Industries (NBR) (-4.90%), Southwestern Energy (SWN) (-4.64%), and EOG Resources (EOG) (-4.11%).
The Nasdaq Composite ($COMPX) ended the session lower by 37.07 points, or 1.46%, on Tuesday and it closed at 2,494.95. Only seven of the Nasdaq-100's index components posted a gain. The top three were Hologic Inc. (HOLX) (+2.81%), Altera Corp. (ALTR) (+1.09%), and Urban Outfitters (URBN) (+1.04%). The weakest performers in the Nasdaq-100 were Seagate Technologies (STX) (-3.70%), Foster Wheeler (FWLT) (-3.68%), Electronic Arts (ERTS) (-3.63%), Adobe Systems (ADBE) (-3.39%), and Wynn Resorts (WYNN) (-3.38%).
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.