Good day! I hope you've enjoyed the three-day weekend!
The market was wavering between the bulls and the bears as the final trading day for this past week kicked off on Friday. With just over an hour to go before the opening bell, the index futures were striking support in premarket trade. Both the S&P 500 and Dow Jones Ind. Average contracts were hitting slightly lower lows, creating a reversal strategy ahead of the open called a 2B. This is a type of double bottom in which the second low serves as a bear trap. The pace of the overall premarket selloff, however, made it questionable as to whether or not the indices would be able to gain enough momentum for another push to new highs for the year. It did not take long, however, for the momentum that build once the reversal was underway.
Among the data released on Friday were December retail sales, which rose 7% in 2010. Retail sales in December were up 0.6%. This was slightly less than an expected gain of 0.8%. Business inventories were up 0.2% in November. Meanwhile, the Labor Department reported that the Consumer Price Index climbed 0.5% in December. The core CPI rose 0.1%. This excludes the volatile food and energy prices. Later, the Thomson Reuters/University of Michigan Consumer Sentiment Index fell to 72.7 from 74.5 last month.
Dow Jones Industrial Average (Figure 1)
Earnings season kicked off slowly last week. The most notable ones ahead of the weekend were Intel's (INTC) on Thursday afternoon and JP Morgan's (JPM) on Friday morning.
Intel reported strong profits and sales and gapped higher into Friday's open after a number of brokerages raised their price targets on the shares, but it was still hit with selling out of the open and ended the session down $0.21 a share. Although Intel ended the session lower, semiconductor equipment manufacturers jumped after Intel announced that it would be spending $9 billion on capital equipment over the course of the year.
JP Morgan faired better than Intel following its earnings and was up approximately $1.50 a share by mid-afternoon. Nevertheless, it did give back two-thirds of those gains in the final two hours of trade after the 14:00 ET reversal period hit. It ended the session higher by $0.46 a share.
Earnings season will be gaining momentum this week and will include 10% of the S&P 500 companies. Citigroup (C), Apple (AAPL), and IBM (IBM) will be reporting their quarterly earnings on Tuesday. Wednesday's slate includes Goldman Sachs (GS) and Wells Fargo (WFC), while Morgan Stanley (MS), Google (GOOG), and Advanced Micro Devices (AMD) report on Thursday. Bank of America (BAC) and General Electric (GE) will be reporting ahead of Friday's opening bell.
The latest housing data will also be released this week and includes the National Association of Home Builders and Wells Fargo housing affordability index, building permits and housing starts, as well as existing home sales.
S&P 500 (Figure 2)
After turning higher into Friday's opening bell, the rally continued throughout the remainder of the session. The 5 minute, 20 period moving average served as support and new highs were once again established for the year. The rally pushed to mimic the move off Tuesday's lows into Wednesday morning highs. After testing that level shortly after futures trading resumed on Sunday evening, another correction began that remains in play heading into Monday evening in the index futures. Most of the correction is through time rather than price, keeping the bull's hopes alive into Tuesday morning.
As I mentioned last week, however, it's precarious ground to stand on. The indices continue to hold their 10 and 20-day moving averages and for the S&P 500 its been over a month since its 10-day moving average has broken. Although the market is due for a break, tread gingerly to begin with until the pace of the buying shifts intraday.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a gain of 55.48 points, or 0.47%, and closed at 11,787.38 on Friday. Financials were amongst the strongest performers for the session. Bank of America (BAC) ended the day higher by 3.25%, while American Express climbed 2.64%. McDonald (MCD) (+1.91%) and DuPont (DD) (+1.76%) followed. Merck (MRK) was the weakest performing, adding another 1.33% to Thursday's losses. Intel (INTC) (-0.99%) and Verizon (VZ) (-0.95%) rounded off the top three decliners. The Dow ended the week higher by 0.96%.
The S&P 500 ($SPX) rose 9.48 points or 0.74%, and closed at 1,293.24. Novellus Systems (NVLS) (+12.31%) was the strongest performer on Friday, benefiting from Intel's (INTC) plans to boost capital spending. Applied Material (AMAT) followed with a gain of 7.58% and Altera (ALTR) rose 6.41%. American International Group (AIG) was the top decliner. It fell another 5.58% on Friday after triggering a 2T reversal off the year's highs on Monday. After recapitalization, the government was left with a 92% stake in the company. Consol Energy (CNX) followed with a loss of 4.29%, while Massey Energy Co. (MEE) fell off its 2-year high with a loss of 3.55% for the day. The S&P 500 ended the week higher by 1.71%.
The Nasdaq Composite ($COMPX) ended the session higher by 20.01 points, or 0.73%, on Friday and it closed at 2,755.30. KLA-Tencor (KLAC) (+5.94%) followed Applied Materials (AMAT) and Altera (ALTR) at the top of the Nasdaq-100 gainers list. The weakest shares in the Nasdaq-100 were Ctrip.com (CTRP) (-2.41%), Activision Blizzard (ATVI) (-2.33%), and Infosys Technologies (INFY) (-1.55%). The Nasdaq Composite ended the week higher by 1.93%.
Gold continued to retreat into the weekend. The reversal strategy I wrote about in early December continued to weigh on the commodity over the course of the past month. If offered a stronger confirmation as the New Year kicked off by cleanly breaking the 50-day moving average support that had held since August. The next hurdle is the 20-week moving average. This zone has held since late-2008, but appears ready to finally give way once again. Gold closed at $1,360.50 an ounce on Friday.
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.