China bounces Japan as second largest economy

Good day! Monday's session was a quiet one for the markets. Volume was light and the trading range was narrow with the indices posting very little change by the end of the day. There wasn't much for market participants to grab onto to get things moving this morning either. The only event stateside to catch headlines was U.S. President Obama's 3.73 trillion federal budget proposal for 2012. If passed, the budget would include a five-year freeze on discretionary spending and a two-year freeze on the salaries for those in the federal government. Congress will hold budget hearings throughout the remainder of the week.

Dow Jones Industrial Average (Figure 1)

The premarket action for the day was a bit more exciting. China overtook Japan as the world's second-largest economy with a value of $5.88 trillion in 2010 as compared to Japan's $5.47 trillion. China's trade surplus narrowed in January with imports up 51% for the month while exports rose 37.7%. Asian markets ended higher on the day.

Meanwhile, the index futures continued to steadily hit higher highs between Friday's mid-day peak and the 2:00 a.m. ET correction period on Monday morning. This series of slightly higher highs, however, slowed the overall momentum of the rally that began ahead of last Friday's opening bell. This created a "wedge" type of formation on the 15 minute time frame that typically breaks lower, although often not as sharply as when the momentum shift does not involve a wedge. A wedge formation in the markets is an ascending triangle with slightly higher highs and higher lows. It can lead to a reversal, but often merely leads to a longer and more gradual correction over time.

S&P 500 (Figure 2)

The Dow Jones Ind. Ave. futures are typical of a reversal following a wedge. Notice that on the 15 minute charts, the correction is still slower than the initial upside move last Friday. The S&P 500, however, is a more common outcome. Its reaction has led to a trading range that even involved a slightly higher high on Monday afternoon to create another reversal pattern off highs heading into afterhours trade.

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