Good day! The indexes shot past last year's highs on Monday to kick off 2011. The index futures rallied strongly off Friday's lows after testing the lower end of the trading channel that began on Wednesday. This was the third test of lows on the all-sessions charts and it resulted in an exhaustion to the gradual pullback. The entire channel broke higher after trading resumed on Sunday evening and since the overall pace of the correction was slower-than-average, the resulting reversal was quite rapid.
As seen in blue on the 15-minute chart of the Dow futures, the late-evening rally was the third push to the upside since bottoming on Friday morning. This once again created exhaustion. This time, however, the pace of the rally kept the mood bullish and the indexes congested at highs throughout most of the morning in premarket trade on Monday.
Dow Jones Industrial Average
The uptrend resumed shortly after 7:00 a.m. ET and hit initial resistance at new morning highs at 8:00 a.m. A gradual pullback followed as the opening bell approached. It was only a matter of minutes before the first setup triggered intraday. The indices stalled for several minutes at the open, creating a gap strategy that triggered when the five-minute highs broke. A smaller base was also present on the 1 minute and tick charts that could have been used as alternative entry triggers. Gap strategies such as this work particularly well when the market is breaking out on the daily charts as a result of the gap. Breakdowns work equally as well on the short side.
By the time the 10:00 a.m. ET economic data was released, the market was already extended on the 5 minute time frame. The result was a very modest reaction to the latest manufacturing and construction reports. According to the Institute for Supply Management, its national factory activity index rose for the 17th straight month in December. New orders rose, although employment hit a 9-month low. Meanwhile, construction spending was also on the rise. It hit a five-month high in November.
The market continued to rise throughout the morning following the data, but the pace slowed. By noon the indexes were having trouble hitting and holding new highs and began to round off. The uptrend channel broke in the early afternoon with the Nasdaq leading the correction shortly after noon. It triggered a Momentum ReversalTM on the five-minute time frame that led to selling into the closing bell.
The S&P 500 and Dow Jones Ind. Ave. also remained weak throughout the second half of the day. Their most notable sell signals came at 14:00 ET when the break of the morning's uptrend channel was followed by a base between 13:00-14:00 ET. This is a little difficult to discern on the charts here due to the distortion of the gap, but the set-up was a nearly textbook version of a short pattern I call the AvalancheTM. It triggered coming out of the 14:00 ET correction period and the 5 minute 20 sma remained resistance for all three of the major indices throughout the afternoon.
The Dow Jones Industrial Average ($DJI) had a gain of 93.24 points, or 0.81%, and closed at 11,670.75 on Monday. The mortgage-related financials were the top performers in the index. Bank of America (BAC) rose 6.37%, while JP Morgan Chase (JPM) closed higher by 2.73%. They were followed by strong gains in Alcoa (AA) (+2.66%) and Exxon Mobil (XOM) (+1.96%). Four of the Dow's thirty index components posted a loss. The top two were Intel (INTC) (-0.86%) and Coca-Cola (KO) (-0.84%).
The S&P 500 ($SPX) rose 14.25 points or 1.13%, and closed at 1,271.89. The top percentage performers in the index on Monday were Sprint Nextel (S) (+6.62%), Bank of America (BAC) (+6.37%), Lincoln National (LNC) (+5.29%), and Consol Energy (CNX) (+4.99%). The weakest were Tyson Foods (TSN) (-4.65%), Clorox Co. (CLX) (-2.70%), and Constellation Brands (STZ) (-2.44%).
The Nasdaq Composite ($COMPX) ended the session higher by 38.65 points, or 1.46%, on Monday and it closed at 2,691.52. The top percentage gainers in the Nasdaq-100 were Wynn Resorts (WYNN) (+4.96%), Netapp (NTAP) (+4.46%), Intuitive Surgical (ISRG) (+4.36%), and Express Scripts (ESRX) (+4.16%). The weakest in the Nasdaq-100 were Lam Research (LRCX) (-3.57%), NII Holdings (NIHD) (-2.64%), and Expedia (EXPE) (-1.20%).
We are unlikely to see a repeat of Monday's rally as we head into Tuesday. The current price action is favoring a trading range on the 30-minute, all-sessions time frame. This time frame includes pre and post-market trade in the futures markets. It should be a decent session for day trading strategies based upon the five-minute time frames.
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.