Good day! This past week, which was shortened in the U.S. due to the Thanksgiving holiday, was a roller coaster ride for short-term market participants. The major indices struck strong support at the zone of their 50 day moving averages on November 16th and have been struggling with that level ever since.
The increased pace and extent of the selloff earlier this month put the bulls on edge. The market had been rewarding the bulls since the beginning of September and offering the bears harsh punishment for attempting to go against the trend until this month. Now the roles have been reversed. As we headed into the week, both sides began to move to the sidelines with a "wait-and-see" attitude as the Christmas holiday shopping began.
Dow Jones Industrial Average (Figure 1)
The Dow Jones Industrial Average ($DJI) had a loss of 95.28 points, or 0.85%, and closed at 11,0092.00 on Friday. Cisco Systems (CSCO) was the only component in the Dow that posted a gain for the session. It was up 0.15%. The financials were among the weakest performers, JP Morgan Chase (JPM) fell 1.73%, American Express (AXP) ended the session lower by 1.70%, and Bank of America (BAC) fell 1.42%. DuPont rounded off the top four weakest performers with a loss of 1.59%. The Dow ended the week lower by 1%.
The S&P 500 ($SPX) fell 8.95 points, or 0.75%, and closed at 1,189.40. The best performers in the index on Friday were Monster Worldwide (MWW) (+3.67%), Marshall & Illsley (MI) (+2.15%), Hormel Foods Corp. (HRL) (+1.16%), and JDS Uniphase (JDSU) (+1.15%). Aflac Inc. (AFL) was the weakest performer. It fell 4.50%. It was followed by losses in Eastman Kodak (EK) (-3.51%), Office Depot (ODP) (-3.44%), and Pulte Group Inc. (PHM) (-3.43%). The S&P 500 ended the week lower by 0.86%.
The Nasdaq Composite ($COMPX) ended the session lower by 8.56 points, or 0.34%, on Friday and it closed at 2,534.56. Vertex Pharmaceuticals (VRTX) (+1.30%), Adobe Systems (ADBE) (+1.13%), Mattel Inc. (MAT) (+1.10%), and Teva Pharmaceutical (TEVA) (+0.64%) were the top percentage gainers in the Nasdaq-100. Joy Global (JOYG) (-2.27%), Millicom Intl. Cellular (MICC) (-1.95%), and Gilead Sciences (GILD) (-1.80%) were the weakest. The Nasdaq Composite ended the week higher by 0.65%.
A lot of eyes will be on the markets this week. It's a busy one from a data standpoint, as well as a technical one. Everyone will start to watch closely for news from the retailers on how they fared on Black Friday, which is when consumers typically make about 10% of their holiday purchases. So far there has been initial optimism. While we wait for the data on Friday's spending to trickle in, don't forget that this week kicks off with Cyber Monday, which marks one of the busiest online shopping days of the year. Recent data has suggested that consumer spending has been on the rise, but buyers still remain cautious, particularly when it comes to "big ticket" items.
S&P 500 (Figure 2)
Although Monday will still be slow for data in the U.S., it picks up substantially beginning on Tuesday with economists looking for a reading of 59.8 on November's Chicago PMI, which is its regional manufacturing index. Last month it came in at 60.6, but anything over 50 shows expansion. The Case-Shiller home price index for September follows the opening bell. Analysts are anticipating a 1% rise. Later, the Conference Board will release its reading for November consumer confidence, which is expected to climb from 50.2 to 52.
European debt concerns have also continued to weigh on the global markets as speculation abounds over which countries will need assistance and whether or not, or to what extent, the European Union and the International Monetary Fund will provide it. The prime ministers of both Portugal and Spain have shunned the rising belief that their countries will need bailout funds, but their insistance has done little to dampen rising concerns. Greece and Ireland have already accepted bailouts. The increased debate impacted the financials on Friday, driving them lower into the weekend.
Nasdaq Composite (Figure 3)
Traders also need to be on the look-out from a technical perspective this week. Even though this past week was a choppy one, the fact that the indices have been shadowing their 50 day moving averages is not a good sign for the bulls. When this happens, along with a decrease in volume, the most common outcome is a breakdown. This typically takes place when the period of congestion is just under the amount of time it took for the market to pull off the highs and into the congestion to begin with. In this case the pullback lasted abut 6 days, so the zone of congestion would be expected to break within 12 days of the support hitting on the 16th. The congestion has lasted for 8 days so far.
I was not originally expecting this bearish pattern to form so quickly. Since the market popped at the beginning of the month, there was a higher chance of a double top or slightly higher high before a larger correction took place, such as the one in April. Without it, the pattern that is forming now, an AvalancheTM, may not offer as strong of a follow-through move as it typically would. This is a positive thing for the bulls in the short-term, but probably won't help them out going into the New Year.
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.