Good day! Friday was a difficult day for the markets. The session was plagued with choppy intraday trading action and the bulls and bears were split with technology shares weighing heavily on the Nasdaq-100. Meanwhile, General Electric (GE) provided substantial strength for the Dow Jones Ind. Average ($DJI). It hit 52-week highs with an intraday gain of 7.11% and pulled the Dow to its highest level intraday since June, 2008 after reporting better-than-expected earnings with profits of 36 center a share and revenue of $41.1 billion.
Dow Jones Industrial Average (Figure 1)
The indices had two solid waves of upside on Thursday afternoon that returned them to intraday highs and wiped out most, if not all, of the morning losses by the end of the session. In the last hour of trade they pulled back and hit the 15 minute 20 period moving averages just prior to the closing bell. This level served as support and a location that left the market open to a reaction afterhours.
On the all-sessions time frame the index futures fell into a trading range whereby prices swung back and forth between the afternoon highs and the price zone of the closing lows until early morning. The momentum shifted within this trading range to favor a break higher in premarket trade. The final premarket low of the range on Friday morning was at the 3:00 a.m. correction period and by 4:00 a.m. ET the indices were starting to break higher out of a 5 minute PhoenixTM that formed at the end of the range.
The pattern I call a PhoenixTM is a buy setup that quickly returned the index futures to the upper end of the trading range heading into 6:00 a.m. ET in the S&P 500 and Dow Jones Ind. Ave. futures. At this time, the weaker Nasdaq was hitting previous highs. After a brief pause, the new uptrend continued into 8:00 a.m. ET where it once again struck price resistance. The two waves of premarket upside were comparable to the two waves off Thursday afternoon lows.
This time, instead of slowing and forming a pullback, the indices held the highs with a two-wave continuation pattern. This forms when the market falls into a trading range with two corrective waves off highs within the range. The second wave is preferably slower than the first. This triggered a third and final push higher into Friday's opening bell on the 5 minute time frame.
Interestingly, this also created a third wave higher on the intraday charts when we take out afterhours and premarket trade. This established trend exhaustion on not only the all-sessions charts that did include that data, but the intraday ones preferred by daytraders as well. This exhaustion took place into 10:00 a.m. This is typically not a corrective period for the market except when accompanied by economic data, but on Friday there were no major reports on tap.
S&P 500 (Figure 2)
The 10:00 a.m. high in the market held throughout the remainder of the session. The Nasdaq had a strong downtrend into the closing bell, while the S&P 500 and Dow dealt with a higher degree of choppy trade. Initial support hit at 11:45 a.m. ET. A double bottom on the 5 minute charts offered some mid-day daytrade action. The next opportunity, however, didn't take place on the 5-15 minute charts until the final 45 minutes of the day when the afternoon trading range broke to the downside. This drop took the tech-heavy Nasdaq-100 back to Thursday's lows at the closing bell.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a gain of 49.04 points, or 0.41%, and closed at 11,871.84 on Friday. Over half of the Dow's thirty index components posted a gain. Following GE, other top performers were American Express (AXP) (+1.61%), Exxon Mobil (XOM) (+1.58%), and Disney (DIS) (+1.46%). The weakest performer was Bank of America (BAC) (-1.99%) following disappointing earnings after it was hit by writedowns on home loans and lower-than-expected trading revenue. Other top percentage decliners were Alcoa (AA) (-1.19%), Microsoft (MSFT) (-1.16%), and Caterpillar (CAT) (-1.16%). The Dow ended the week higher by 0.72%.
The S&P 500 ($SPX) rose 3.09 points or 0.24%, and closed at 1,283.35. The top percentage gainer in the S&P 500 was Intuitive Surgical (ISRG) (+12.68%). General Electric (GE) (+7.11%), Dean Foods (DF) (+6.09%), and Suntrust Banks (STI) (+5.85%) also posted gains over 5%. Advanced Micro Devices (AMD) (-5.99%) was the weakest percentage performer in the S&P. Other top losers were Electronic Arts (ERTS) (-4.00%), Jabil Circuit (JBL) (-3.92%), and Peoples United Financial (PBCT) (-3.58%). The S&P 500 ended the week lower by 0.76%.
The Nasdaq Composite ($COMPX) ended the session lower by 14.75 points, or 0.55%, on Friday and it closed at 2,689.54 after vastly underperforming the other major indices. Despite stronger quarterly earnings on Thursday afternoon, Google (GOOG) failed to hold onto its gains and didn't make the list of the day's top performers. Instead, shares closed lower by 2.38%. Investors were disappointed that its chief executive, Eric Schmidt, will be vacating his role with the position going to co-founder Larry Page in April. Instead, News Corp. (NWSA) (+4.50%), Virgin Media (VMED) (+2.80%), and Micron Technology (MU) (+2.50%) followed Intuitive Surgical (ISRG) as the top gainers in the Nasdaq-100. Electronic Arts (ERTS) (-4.00%) was the weakest performer in the Nasdaq-100. Biogen Idec Inc. (BIIB) (-2.92%), Akamai Technologies Inc. (AKAM) (-2.80%), and Flextronics Intl. (FLEX) (-2.55%) followed. The Nasdaq Composite ended the week lower by 2.39%.
This past week was the first losing week in the S&P 500 and Dow Jones Industrial Average since the week of November 21st, 2010. A key technical influence for the weakness stems from the highly watched 1,300 price resistance level in the S&P 500. It hit a high of 1,296.25 this past week, testing the resistance zone. Although there have been a couple of weeks where the gain was minor, it's very rare for the market to go for so long without a larger weekly correction. So far, however, the 20-day moving average remains a key daily support level and one daytraders watch closely for intraday lows. The slower the market reacts to this levels, the easier it becomes to break it.
January remains a month where weakness often sets in as the month winds down. This is also common as earnings season wraps up if the price action heading into the season was already strong. This is the well-known "sell the news" phenomenon. In some cases it only lasts a couple of weeks, but in others it can be a major market turning point. It's often the pace of the correction that can help guide the longer-term bias. Given the current price action, the market is favoring the weekly correction with a third wave higher into spring instead of a larger monthly one. What we would want to see for this to develop further is action similar to what took place in November with the 50-day moving average serving as the main support zone.
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.