Good day! In the early-morning hours of trading in the futures market, the index futures found themselves retesting Tuesday's highs. The Dow Jones Ind. Ave. futures did so with slightly higher highs. These highs held into 2:00 a.m. ET when trading overseas shifted the market bias. Reversals are quite common at this time and a steady selloff began to take hold. Around 5:30 a.m. ET the futures found support and the market congested over the course of the next several hours. Once the premarket earnings began to roll in, however, the selloff resumed and gained momentum.
Dow Jones Industrial Average (Figure 1)
IBM (IBM) and Apple (AAPL) both had strong earnings, but it was not enough to keep the week's rally going. By the end of the day the S&P 500 and Nasdaq-100 had fallen off the year's highs hit on Tuesday and returned to the lower end of the monthly support at their 10-day moving averages. The materials, financials, and energy shares led the decliners. The stand-outs included Goldman Sachs (GS) and Wells Fargo (WFC). Goldman Sachs fell more than 4% after it posted a 53% decline in its quarterly profit. Wells Fargo managed to meet estimates, but weakness in the overall sector weight heavily on it and it still shed more than 2%.
The housing market was also once again in focus on Wednesday. Housing starts in December fell 4.3% to a seasonally adjusted annual rate of 529,000. This was the third-lowest ever and overall starts for 2010 were the second-lowest since records began in 1959. Building permits, however, rose 16.7%. The home builders ended the session lower, but most, such as DHI, PHM, LEN, and BZH were already testing strong resistance levels heading into the session.
S&P 500 (Figure 2)
The selloff that began ahead of Wednesday's open picked up the pace once the bell rang. While the Dow held up initially thanks to IBM, the S&P 500 and Nasdaq were not even able to break their 5 minute highs. The first wave of intraday selling lasted into the 10:45 a.m. ET correction period. Slightly lower lows were hit in the S&P and Nasdaq into 11:15, but congestion prevailed into noon. At that point a second wave of selling took over. It did not last as long as the first, but took the indices to new intraday lows. A third and final wave began around 13:30 ET. This lasted into previous lows and the 15:00 ET correction period.
Although the market didn't show much strength into the closing bell, the three waves of selling exhausted the trend on the 5-15 minute time frames. Slightly lower lows on the 2 minute charts confirmed the larger 15 minute support and also created a smaller Momentum Reversal pattern that was forming with the larger 15 minute time frame on the Dow and S&Ps. Although this is typically a buy strategy, the overall momentum of the selloff was still stronger-than-average, even in the slower portion of the trend that began after 10:45 ET. This leaves the market correcting longer over time and slower via price as afterhours trade continues.
Even though we've been watching for signs of the start of a larger daily correction, this move alone offers no confirmation. The 10-day moving average is still holding firmly, and although the pace of the selloff was strong, it was not stronger than earlier rallies throughout the month. We will need to see slower upside followed by stronger downside with the indices breaking 20-day moving averages before the correction is confirmed. It may still take another week or so, but there will be a number of individual securities that lead the way.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 12.64 points, or 0.11%, and closed at 11,825.29 on Wednesday. Only 8 of the Dow's 30 index components posted a gain for the day. The strongest performers in the index were IBM (IBM) (+3.35%), McDonalds (MCD) (+0.90%), Johnson & Johnson (JNJ) (+0.74%). Bank of America (BAC) (+4.20%), American Express (AXP) (-2.44%), JP Morgan Chase (JPM) (-2.32%), and Cisco Systems (CSCO) (-1.89%).
The S&P 500 ($SPX) fell 13.10 points or 1.01%, and closed at 1,281.92. The leaders in the S&P 500 were Motorola Mobility Holdings (MMI) (+3.68%), International Business Machines (IBM) (+3.35%), and Ross Stores (ROST) (+1.51%). Hudson City Bancorp (HCBK) (-8.51%) was the weakest performer after announcing that its fourth-quarter profit fell 11%. It was followed by losses in CF Inds. Holdings (CF) (-6.21%), United States Steel (X) (-5.93%), and Northern Tr. Corp. (NTRS) (-5.66%).
The Nasdaq Composite ($COMPX) ended the session lower by 40.49 points, or 1.46%, on Wednesday and it closed at 2,725.36. The Nasdaq-100's top performers were Dollar Tree (DLTR) (+3.04%), Ross Stores (ROST) (+1.51%), and BMC Software (BMC) (+1.49%). Only 12 of the 100 posted a gain. The weakest performers were Linear Technology Corp. (LLTC) (-4.35%), Mylan Inc. (MYL) (-3.44%), Lam Research (LRCX) (-3.41%), and Seagate Technology (STX) (-3.09%).
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.