Good day! On Friday the market made headlines as the S&P 500 and Nasdaq had their largest one-day drops since last August and the Dow was hit by its largest one-day loss since mid-November. Strong price resistance at 1,300 in the S&P 500 and 12,000 in the Dow Jones Ind. Average played a role, as did the extent of the daily rally into those levels without larger corrections. It was headlines abroad, however, that garnered the greatest interest and affected everything from the indices to gold to oil to currency action.
On Monday some of the impact of Friday's news of escalating unrest in Egypt had begun to sink in. The selloff on Friday had slowed momentum in the second half of the session, leaving the S&P 500 and Dow Jones Ind. Ave. index futures with three distinct lows on the 5 and 15 minute charts within the second half of the day. This formed the core Momentum ReversalTM you've seen me discuss on a number of occasions in this column, but when a Momentum ReversalTM forms off a support level on the first pullback off new highs like it did on Friday, the upside potential can be limited. It's difficult for the market to establish the sharp reversals we see more often when this pattern forms after a more extended downtrend. As a result, I wasn't expecting much from it when the session began on Monday.
Dow Jones Industrial Average (Figure 1)
Further weakness in afterhours trade didn't help. But the pattern didn't trigger on the all-sessions charts due to further lows on Sunday evening. It was only when we take out the pre- and post-market trade that the pattern become evident in the S&P 500 and Dow Jones Ind. Ave. futures. The pattern confirmed when both of these pulled back in the upper end of the 5 minute channel out of Monday's opening bell. The buy setup triggered as that early-morning channel broke to the upside out of 10:15 a.m. ET.
The Nasdaq also formed a reversal pattern off lows, but instead of slightly lower lows on Friday afternoon, the index created a symmetrical triangle along lows. The subsequent breakdown led to one slightly lower low on Sunday evening that created a bear trap called a 2B. This triggered a reversal early on Sunday evening, but since the pace of the drop into that second low was similar to the drop into Friday's low, the correction got off to a slow start.
S&P 500 (Figure 2)
All three of the indices experienced the greatest upside between 10:15 a.m. and 12:30 ET. The remainder of the session was spent in a trading range. The overall pace of the correction off Friday's lows thus far has indeed been more gradual than that original selloff. Although substantially smaller than Friday's range, the intraday trading range on Monday was still decent. So was the volume. This made for an active session despite the weaker strategies. The slower upside move has been continuing after Monday's closing bell as well. We should see resistance from this correction hit before Tuesday's open and another rapid drop. I do not expect the next drop on the all-sessions charts to break Friday's lows. Instead, it is more likely that the indices hold in a trading range on the 30 minute charts over the next day or so.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a gain of 68.23 points, or 0.58%, and closed at 11,891.93 on Monday. The month ended with the Dow's strongest January performance in 14 years (+2.13%). Every once in awhile the market likes to break a trend! Over two-thirds of the Dow's thirty index components posted a gain on the day. The top performers were Alcoa (AA) (+2.73%), Exxon Mobil (XOM) (+2.14%), IBM (IBM) (+1.75%), Chevron (CVX) (+1.67%), and Caterpillar (CAT) (+1.39%). The worst performers were Procter & Gamble (PG) (-1.67%), WalMart (WMT) (-1.11%), and American Express (AXP) (-1.09%).
The S&P 500 ($SPX) rose 9.78 points or 0.77%, and closed at 1,286.12. Pall Corp. (PLL) was the strongest performer in the index. It busted sharply higher with a breakaway gap on the daily and weekly time frame for a gain of 13.87%. Other top percentage performers included Massey Energy Company (MEE) (+9.84%), Chesapeake Energy (CHK) (+8.05%), Newfield Expl. (NFX) (+5.98%), and Denbury Res. (DNR) (+5.60%). As you can see, energy shares were among the strongest of the S&P 500's industry groups. Exxon Mobil (XOM) helped the sector by posting stronger-than-expected earnings and unrest in Egypt continued to push oil prices higher. Crude oil ended the session higher by 2.9% and settled at $92.19 a barrel with its highest close since October, 2008 over concern about shipment disruptions in the Suez Canal.
The largest percentage losses in the S&P 500 were seen in Motorola Mobility (MMI) (-5.81%), Whirlpool Corp. (WHR) (-4.92%), Sandisk (SNDK) (-3.06%), and Gannett Inc. (GCI) (-2.96%).
The Nasdaq Composite ($COMPX) ended the session higher by 13.19 points, or 0.49%, on Monday and it closed at 2,700.08. The strongest performers in the Nasdaq-100 were First Solar (FSLR) (+4.81%), Electronic Arts (ERTS) (+3.93%), Genzyme Corp. (GENZ) (+3.16%), and Paccar Inc. (PCAR) (+3.05%). The weakest were Check Point Software Tech. (-3.61%), Sandisk (SNDK) (-3.06%), Netflix (NFLX) (-1.79%), and Research In Motion (RIMM) (-1.73%).
Monday's economic data didn't have much of an impact on the day's trade. The Commerce Department reported that personal spending was slightly higher-than-expected last month at 0.7%. Personal income, however, fell short and rose 0.1% less than the expected gain of 0.5%.
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.