Good day! The rally over the past two weeks in the indices has left them over-extended on the daily time frame and seeking corrective action. That shorter-term bias began to play out in Monday's session after gradual gains throughout most of the session gave way to selling in the final hour. Nevertheless, the sharp retreat found support as the price congestion that took place over the weekend and into early Monday morning. This support can be seen on the 15 minute charts of the Dow Jones Ind. Ave. and S&P 500 futures in Figures 1 and 2. At this zone of support, the pace of the selling shifted. A series of slightly lower lows formed to create a pattern I call a Momentum ReversalTM that triggered a buy setup heading into midnight Eastern.
Dow Jones Industrial Average (Figure 1)
The early-morning rally in the index futures was slower than the previous afternoon's descent, and faced pressure from abroad, but it began to recover heading into the day's economic data in the U.S. At 8:30 a.m. the latest in retail sales data was released and Wall Street and Main Street alike were crossing their fingers that the preliminary reports on holiday shopping activity from November would be able to surpass already high expectations. They managed to do just that, rising 0.8% and 1.2% excluding autos. At the same time the Producer Price Index for November also hit the wires. Analysts anticipated rising food and fuel prices to result in a 0.7% overall increase in the PPI. It rose 0.8% with the core PPI up 0.3%. This was slightly better than anticipated.
The rally gained momentum following the opening bell. The 5 minute 20 period moving average served as initial resistance, but all three of the major indices pushed through this barrier out of 10:00 a.m. ET. At that time, the Commerce Department reported that business inventories grew 0.7% in October, which was greater than the 1.1% increase analysts were anticipating. The strongest intraday gains took place prior to 10:30 a.m. ET. This was when the Nasdaq retested Monday's afternoon highs, which served as a strong resistance level. Price action began to drop off after that point as more and more market participants began to move to the sidelines in anticipation of the day's FOMC announcement.
S&P 500 (Figure 2)
The bulls held onto the reins throughout mid-day, but slightly higher highs in the Dow and S&P merely created the same type of Momentum ReversalTM seen in the opposite direction heading into midnight on Monday, as well as the one that took place on the 15 minute charts intraday heading into Monday afternoon off highs. This created a bearish bias before the afternoon news even hit the wires.
Unsurprisingly, the Fed kept interest rates unchanged. The S&Ps tested Monday's highs, but this was merely a bull trap on the 5 minute charts. Despite recent news suggesting improvements in the economy, the Fed continued to express concern that the pace of the improvements are not enough to combat the country's high unemployment rate. It also reaffirmed plans to move ahead with further quantitative easing to the tune of $600 billion (aka "QE2"). The U.S. dollar fell against major currencies following the news, as did the major indices. The Momentum ReversalTM confirmed at about into 14:40 ET and the indices continued lower into major 15 minute price support levels once again before bouncing back into positive territory in the final 25 minutes of trade.
Nasdaq Composite (Figure 3)
The S&P 500 ($SPX) rose 1.13 points or 0.09%, and closed at 1,241.59. The stop performers in the index were American Intl. Group (AIG) (+6.7%), Vulcan Materials (VMC) (+5.78%), Amgen Inc. (AMGN) (+4.90%), and Mylan Inc. (MYL) (+4.29%). Best Buy (BBY) was the weakest performer in the index, falling a whopping 14.82% after the electronics retailer reported weaker-than-expected quarterly sales. Its revenue was down from $12 billion to $11.9 billion year-over-year (estimates were for $12.5 billion), and same-store sales fell 3.3%. Additionally, it dramatically lowered its full-year earnings from previous estimates of $3.55-$3.70 a share to $3.20-$3.40 a share. The other top decliners in the index for the day were Huntington Bancshares (HBAN) (-5.41%), Salesforce.com (CRM) (-5.25%), and Regions Financial (RF) (-5.19%).
The Nasdaq Composite ($COMPX) ended the session higher by 2.81 points, or 0.11%, on Tuesday and it closed at 2,627.72. Amgen (AMGN) was the best performer in the Nasdaq-100. The company released results from a study that indicated that its denosumab drug, which it calls Xgeva, delays the spread of prostate chancer to men's bones by stalling the malignancy's spread by 4.2 months. Further studies are being undertaken to gauge any affects it may also have on breast cancer patients. The company's shares ended the session higher by 4.90%. Mylan Inc. (MYL) (+4.29%) was the second-best performer. It was followed by Millicom Intl. Cellular (MICC) (+3.93%) and Comcast (CMCSA) (+2.14%). Netapp (NTAP) (-3.76%) and Priceline (PCLN) (-2.85%) were the weakest shares in the Nasdaq-100.
The Consumer Price Index, which is the most widely watched gauge for inflation, is due out ahead of Wednesday's open. In its policy statement on Tuesday, the Fed noted that underlying inflation (which excludes the more volatile items such as food and energy) was continuing to trend lower. The indices remain extended on the daily time frame, so a larger correction lasting several weeks is likely to kick off heading 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.