Good day! The S&P 500 tested its 20-day moving average and closed under its 10-day moving average for the first time in over seven weeks on Thursday as the market continued Wednesday's correction. The renewed breakdown into Thursday's opening bell followed a long period of congestion as the market reacted primarily through time versus price to the support levels as discussed in yesterday's column. These hit at approximately 15:00 ET on Wednesday and followed a series of three lower lows intraday which exhausted the trend into price support levels from previous lows, as well as the 10-day moving average in the S&P 500 and Nasdaq-100.
Dow Jones Industrial Average
Interestingly, a lot of the news I read last evening pointed to China's latest gross domestic product reading as the culprit driving prices down. While this certainly affected key stocks with a higher degree of exposure in China, such as Caterpillar (CAT) (-2.02%), DuPont (DD) (-1.55%), and Boeing (BA) (-0.85%), the index futures did not react strongly to the news. China's GDP was stronger-than-expected, which increased speculation on the continuing pace of inflation and rate hikes to curb it.
The real selling on Thursday came after 9:00 a.m. ET. With the 20-day moving averages looming, however, the extent to the retracement was not as strong as the previous day. Three waves of continuation selling took place between 10:00 a.m. ET and 11:30 a.m. ET when that daily support finally hit. Reversals promptly followed.
Corrective moves in the market tend to come in two waves. The first wave on Thursday took place between 11:30 a.m. to nearly 13:00 ET. The market then rested and formed its second wave of upside out of 13:30 ET correction period. This second wave mimicked the first and stalled at equal move resistance and a slew of moving averages and prices resistance from premarket levels when it tested them just over an hour later.
S&P 500
The Dow Jones Industrial Average ($DJI) had a loss of 2.49 points, or 0.02%, and closed at 11,822.80 on Thursday. Half of the Dow's thirty index components posted a gain for the session, led by Home Depot (HD) (+2.41%), JP Morgan Chase (JPM) (+2.38%), WalMart (WMT) (+1.74%), and Bank of America (BAC) (+1.18%). The weakest performers were Caterpillar (CAT) (-2.02%), DuPont (DD) (-1.55%), and Boeing (BA) (-0.85%). These companies all have higher degrees of exposure in China and the latest report showing a stronger-than-expected GDP in China increased speculation on the continuing pace of inflation and rate hikes to curb it.
The S&P 500 ($SPX) fell 1.66 points or 0.13%, and closed at 1,280.26. The leaders in the S&P 500 were eBay (EBAY) (+5.77%), Sears Holdings (SHLD) (+5.15%), Morgan Stanley (MS) (+4.58%), and Biogen Idec (BIIB) (+3.83%). The worst performer was F5 Networks (FFIV) (-21.35%). American International Group (AIG) was also hit hard with a loss of 15.37%. Salesforce.com (CRM) (-6.43%) and Parker Hannifin (PH) (-6.12%) rounded off the top four decliners.
Nasdaq Composite
The Nasdaq Composite ($COMPX) ended the session lower by 21.07 points, or 0.77%, on Thursday and it closed at 2,704.29. EBAY, SHLD, and BIIB topped off the Nasdaq-100 as well. It was followed by News Corp. (NWSA) (+3.02%) and and First Solar (FSLR) (+2.58%). FFIV was the weakest stock in the Nasdaq-100. It was followed by losses in Seagate Technologies (STX) (-5.80%) and Marvell Technology (MRVL) (-3.77%).
The closing prices in the indices were slightly off highs after the market began to react to the two waves of correction off mid-day lows. The downtrend could have continued afterhours and into the early morning if the pace of the price action that followed had shifted once again. The pullback into the close, however, was the strongest to form on the downside following the bell. A bounce into afterhours was followed by a second pullback that was even more gradual than the one from 14:45 ET onward. It found support at 21:00 ET and triggered a buy. It wasn't quite enough to bring back the bulls on a larger scale, but another slow pullback into midnight was and the pace continued to shift favorably for the bull before triggering a strong buy setup around 4:00 a.m. ET
The premarket rally that took place heading into Friday struck resistance around 8:00 a.m. after putting in a rally that was equal to the afternoon rally on Thursday. This leaves the market dealing with this larger 15 minute resistance zone as Friday's opening bell approaches and could easily put pressure on the bulls. A period of congestion this morning would be ideal for the bulls, but watch out. If there are a series of slightly higher highs on the five minute charts, this can create stronger intraday pullbacks.
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.
