Market Posts a Loss for November
Good day! November was a difficult month for the market. It began by pushing into previous monthly highs and even managed slightly higher highs for the year, but after two months of strong gains it was starting to run out of steam. It finally succumbed to exhaustion on November 16th and the indices quickly fell through their 20 day moving averages and into their 50 day ones. This support level proved to be enough to stem the flow of selling, but it's been a roller coaster of a ride intraday ever since.
Dow Jones Industrial Average
Volume picked up on Tuesday as traders continued to return from the holiday weekend. The session began with a larger-than-average gap to the downside after early morning selling returned the index futures to previous lows. They continued to hold support, however, and managed a rapid recovery attempt once the highs of the initial 15 minutes of the regular trading session broke. I will often use this level as a gauge to judge the strength of a gap and a strong downside gap that breaks 15 minute highs is typically a good buy trigger.
The initial gap setup took the index futures higher unto 10:30 a.m. ET where they met their first major intraday resistance at the 5 minute 20 period moving average. Prices fell into a long period of intraday congestion at that resistance level that lasted throughout the remainder of the morning. The Nasdaq displayed the greatest relative weakest throughout this period. After two small waves of selling within the congestion, the market made a play for a break higher heading into noon. This was still on the early side when examined on the 15 minute charts, but the bulls were not fazed.
The market continued to shift momentum on the 5 minute time frame with another very gradual correction off resistance that took place in the upper end of the late morning trading range. This triggered a stronger buy setup heading into the 13:00 ET correction period.
Although the afternoon rally was decent from a day trading perspective, closing the gap in the S&P 500 with a move that nearly hit equal move resistance compared to the rally into 10:30 a.m. ET, buyers were still wary. The indices were still trading along that 50 day moving average, taunting bulls and bears alike. A minor shift in the pace of the buying into 13:30 ET gave way to several sell setups on a 5 minute time frame that kept the market in the red throughout most of the afternoon, but the selling was not as pronounced as the drop that took place in premarket trade and the index futures rolled back over into the late-evening hours.
The Dow Jones Industrial Average ($DJI) had a loss of 46.47 points, or 0.42%, and closed at 11,006.02 on Tuesday. The best performers in the Dow were Caterpillar Inc. (CAT) (+1.1%), United Technologies Corp. (UTX) (+0.6%), WalMart Stores (WMT) (+0.4%), and Verizon Communications (VZ) (+0.3%). The weakest performers were Bank of America (BAC) (-3.2%), Procter & Gamble (PG) (-1.7%), Hewlett Packard (HPQ) (-1.6%), and Pfizer (PFE) (-1.6%).
The S&P 500 ($SPX) fell 7.21 points, or 0.61%, and closed at 1,180.55.The best percentage gainers in the S&P on Tuesday included Jabil Circuit Inc. (JBL) (+3.4%), Gap Inc. (GPS) (+3.1%), and Abercrombie & Fitch (ANF) (+3.1%). The weakest were Google (GOOG) (-4.5%), Chesapeake Energy (CHK) (-4.2%), Micron Tech. (MU) (-4.0%), and eBay (EBAY) (-3.6%).
The Nasdaq Composite ($COMPX) ended the session lower by 26.99 points, or 1.07%, on Tuesday and it closed at 2,498.23.
The housing data on Tuesday was not very optimistic. The Case-Shiller index of home prices in 20 major U.S. markets was grim. Overall, home prices were lower by 2% in the third quarter. Prices had shown fractional gains over the past year and a half and economist had been expecting that trend to continue in September. From a technical perspective, however, this is not surprising. The price charts for the housing market showed a marked decline in housing prices leading into 2009 and extremely sharper-than-average price moves rarely reverse with the same enthusiasm. Rounded lows with even slightly lower lows are common even before recoveries do occur.
This is the situation we are seeing on the daily charts of the major indices. Prices fell sharply off the yearly highs and now they are trying to stabilize at the 50 day moving average support. Over the past several days I've talked a little about how this daily correction has formed. Typically, a stronger-than-average drop into a 50 day moving average is a good lead into another bearish pattern I call the Avalanche.
Since the market flushed rapidly higher before the pullback, however, and the congestion in the Dow has seen some slightly lower lows, it adds risk to such a play. Ideally the markets would retest the highs before attempting a larger weekly correction. Wednesday's premarket activity suggests that the indices agree.
China's manufacturing data didn't hurt. China's better-than-expected news was well-received and the index futures shot higher. This does leave them extended heading into Wednesday's session, however, so another day of choppy intraday trade whereby the market continues the daily channel from this past week would not be surprising.
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.
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.