Good day! Earning season kicked into gear first thing on this shortened trading week with Citigroup (C) and Delta Airlines (DAL) among those that released their earnings prior to Tuesday's open. Both companies severely disappointed investors.
Citigroup (C) fell 6.43% after it missing earnings by about 50%, sending banking shares lower. Citigroup did still post its first profit since 2007, however, earning 4 cents per share, excluding one-time items. Wells Fargo (WFC) reports on Wednesday, while Bank of America (BAC) reports on Friday.
Delta (DAL) also missed earnings estimates even though it posted a gain of 19 cents per share. The miss was blamed on rising fuel costs, putting pressure on other airlines as well. Delta shares fell 8.24% on the day.
Dow Jones Industrial Average (Figure 1)
Despite pushing higher in the early-morning hours, the index futures began to selloff steadily around 7:00 a.m. ET into the opening bell. The bell coincided with strong price and moving average support and the markets popped.
The Dow Jones Ind. Average ($DJI) was the strongest of the three major indices throughout premarket and intraday trade on Tuesday. Boeing (BA) led the index after the company announced that the delay on the release of its first 787 would not be extended even further. The first one is expected to be delivered in the third quarter.
Although the Nasdaq ($COMPX) managed to outperform the S&P 500 ($SPX), the index futures were greatly impacted on Monday after Apple (AAPL) CEO Steve Jobs announced plans to take another medical leave of absence. Apple shares struggled to recover from sharp premarket losses, pushing higher throughout the session, but it still ended the day with a loss of 2.25%. The remaining losses were wiped out following Apple's earnings, which were released after the close.
It seems obvious that the Jobs news was timed to have the least impact and feelings that investors would be quickly reassured, at least temporarily, by stellar earnings. Apple's earnings blew through estimates Tuesday afternoon. The company earned $6 billion, or $6.43 a share, with revenue of $26.7 billion. Net income rose 78% year-over-year. Analysts were anticipating earnings of $5.38 a share and revenue of $24.4 billion. The iPad and iPhone played a pivotal role in this success.
S&P 500 (Figure 2)
Even though earnings were not released on Apple until after the closing bell, the Nasdaq showed no continuation of Monday's weakness. While the stronger Dow took the lead intraday, the S&P 500 and Nasdaq remained strong. They rallied throughout the initial 15 minutes of the day and then fell into a solid trading range consisting of two primary waves of correction into the 5 minute 20 period moving average. The second correction was slower than the first and maintained the bullish bias. This created a buy setup that triggered at 11:00 a.m. ET. A continuation of this strategy took place at 12:30 ET and the indices continued to creep higher throughout the afternoon, although the market lacked the stronger setups of the first half of the day.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a gain of 50.55 points, or 0.43%, and closed at 11,837.93 on Monday. The strongest performers in the index were Boeing (BA) (+3.43%), Caterpillar (CAT) (+2.84%), Alcoa (AA) (+1.88%), and Microsoft (MSFT) (+1.27%). A third of the Dow posted a loss. The weakest performers were Verizon (VZ) (-3.10%), Bank of America (BAC) (-1.64%), and General Electric (GE) (-1.17%).
The S&P 500 ($SPX) rose 1.78 points or 0.14%, and closed at 1,295.02. The strongest performers in the index were Total System Services (TSS) (+6.34%), Allegheny Technologies (ATI) (+5.41%), First Solar (FSLR) (+5.05%), and Titanium Metals (TIE) (+4.70%). The weakest were Comerica (CMA) (-8.31%), Citigroup (C) (-6.43%), JDS Uniphase (JDSU) (-4.39%), and Verizon (VZ) (-3.10%).
The Nasdaq Composite ($COMPX) ended the session higher by 10.55 points, or 0.38%, on Monday and it closed at 2,765.85. First Solar (FSLR) (+5.05%) was the strongest performer in the Nasdaq-100. Other top performers included Mylan Inc. (MYL) (+4.52%), Vodaphone Group (VOD) (+4.51%), and Symantec Corp. (SYMC) (+4.00%). The weakest were NVIDIA (NVDA) (-2.37%), Apple (AAPL) (-2.25%), Expedia Inc. (EXPE) (-2.23%), and Yahoo (YHOO) (-1.84%).
Not much has changed in the dynamics of the markets since the start of the week. The uptrend remains in play with the S&P 500's 10 day moving average continuing to hold. Likewise, this keeps the market extended on the upside, but the indices lack adequate reversal patterns under development on even the 15 minute charts as Tuesday wound to a close. This means keeping short strategies with a daytrade objective to begin with.
It's a good time to also make a list of stocks that aren't holding up as well as the overall market for swingtrades on the short side. For example, those that have been hugging a 20 day moving average support level while the market has rallied over the past several weeks. These can break down sharply once the market turns. Also look for securities that rallied sharply from December 31st to January 4th and have been making only slightly higher highs since then. These will also tend to have steeper retracements.
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.