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 $5.47 trillion. China's trade surplus narrowed in January with imports up 51% for the month while exports rose 37.7%. Asian markets ended higher on the day.
Meanwhile, the index futures continued to steadily hit higher highs between Friday's mid-day peak and the 2:00 a.m. ET correction period on Monday morning. This series of slightly higher highs, however, slowed the overall momentum of the rally that began ahead of last Friday's opening bell. This created a "wedge" type of formation on the 15 minute time frame that typically breaks lower, although often not as sharply as when the momentum shift does not involve a wedge. A wedge formation in the markets is an ascending triangle with slightly higher highs and higher lows. It can lead to a reversal, but often merely leads to a longer and more gradual correction over time.
S&P 500 (Figure 2)
The Dow Jones Ind. Ave. futures are typical of a reversal following a wedge. Notice that on the 15 minute charts, the correction is still slower than the initial upside move last Friday. The S&P 500, however, is a more common outcome. Its reaction has led to a trading range that even involved a slightly higher high on Monday afternoon to create another reversal pattern off highs heading into afterhours trade.
Although the Nasdaq outperformed the other two major indices, it also gave in to a bearish bias in the afternoon. Slightly higher highs on slowing momentum on a 5 minute time frame shortly after noon created a 2T reversal that favored further downside. This downside did not gain a lot of momentum until afterhours, but followed through strongly into earlier lows and price congestion soon after the closing bell. This corrective bias on the 30-minutes charts will remain intact as we head into early Tuesday trade.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 5.07 points, or 0.04%, and closed at 12,268.19 on Monday. Twelve of the Dow's thirty index components posted a gain for the day. The top performers were Exxon Mobil (XOM) (+2.52%), Chevron (CVX (+1.27%), Alcoa (AA) (+1.27%), and Pfizer (PFE) (+1.17%). The weakest performers was Wal-Mart (WMT) (-1.60%). JP Morgan downgraded Wal-Mart (WMT) from overweight to neutral, citing a "lack of near-term catalysts". Verizon (VZ) followed with a loss of 1.35% after failing a breakout attempt on the 8th.
The S&P 500 ($SPX) rose 3.17 points or 0.24%, and closed at 1,332.32. The top percentage gainers in the S&P 500 were Tesoro Corp. (TSO) (+7.94%), Netflix (NFLX) (+7.13%), Marathon Oil (MRO) (+6.10%), and Cliffs Natural Resources (CLF) (+5.90%). The weakest were Clorox (CLX) (-6.19%), Motorola Mobility (MMI) (-5.46%), and Macys (M) (-3.05%).
The Nasdaq Composite ($COMPX) ended the session higher by 7.74 points, or 0.28%, on Monday and it closed at 2,817.18. Netflix (NFLX) continued its strong weekly breakout by adding another 7.13% to lead the Nasdaq-100 higher after receiving several upgrades from investment firms. Other top performers were Maxim Integrated Products (MXIM) (+5.11%), Citrix Systems (CTXS) (+4.24%), and Sandisk Corp. (SNDK) (+3.25%). The Nasdaq-100's top losers were Ctrip (CTRP) (-5.40%), News Corp. (NWSA) (-2.76%), Sears Holdings (SHLD) (-2.09%).
Although Monday's session was a slow one for economic data and focused on the government's budget plans, the data will pick up on Tuesday with the Commerce Department's release of January retail sales, as well as the Empire manufacturing data for February and December's business inventories. On Wednesday the latest housing data comes out with the weekly mortgage applications and housing start, as well as the FOMC minutes.
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.