Note: I will be out of town attending the Online Trading Expo in New York this weekend. Due to time constraints, today's column will be my final one until returning Wednesday evening. I hope to see some of you there! All my best, Toni
Good day! OK, so the headline may be getting a little worn since it's been nearly three months since the Dow Jones Industrial Average ($DJI) has actually managed to close under its 20-day moving average. Nevertheless, it's one we've seen yet again with Wednesday's action... The indices have made yet another multi-year high! In the S&P 500 it marks another milestone: a rally of over 100% in less than two years.
Dow Jones Industrial Average (Figure 1)
Wednesday's economic data had little impact on the session's price action.
The latest housing data revealed that the number of housing starts in January rose more than expected, but permits for new construction were weaker. Housing starts were up 14.6% to a seasonally adjusted annual rate of 596,000 units, but building permits were down 10.4% to an annual rate of 562,000 in January. The Mortgage Bankers Association's seasonally adjusted index of mortgage applications and refinances fell 9.5% last week.
January's Producer Price Index, which measures wholesale inflation, rose slightly more than expected to 0.8% in January to come in slightly ahead of expectation. The Core Producer Price Index, which excludes the volatile food and energy prices, rose 0.5%. Analysts were expecting an increase of 0.2%.
U.S. industrial output fell 0.1% in January, while capacity utilization fell to 76.1%. This was lower than analysts' expectations.
As expected, it was strength in technology shares that played a major role in Wednesday's gains. Dell (DELL) beat earnings expectations following Tuesday's close and more than half a dozen brokerages raised their price targets for the stock. This resulted in a gain of nearly 12% on the day. As a bonus to daytraders, a very large portion of the day's gains took place after the opening bell.
Research In Motion (RIMM) also had a strong intraday trend following a gap higher thanks in part to an upgrade by Citigroup.
Other stocks to make headlines outside the realm of earnings and upgrades included Borders Group, which is the second-largest book store chain in the U.S., Genzyme (GENZ), and NYSE Euronext (NYX).
Borders formerly filed for Chapter 11 bankruptcy and announced plans to close 30% of their stores nationwide.
Meanwhile, the anticipated buyout of Genzyme (GENZ) by French drugmaker Sanofi-aventis was formerly announced prior to the opening bell.
Also on the merger and acquisitions front was NYSE Euronext (NYX) who confirmed that it will join Germany's Deutsche Boerse to become the world's largest exchange.
S&P 500 (Figure 2)
From a technical standpoint, the rally on Wednesday actually began late Tuesday afternoon following Dell's (DELL) news. This created the breakout move from Tuesday's trading range, which was also a larger trading range on the 30 minute charts.
The index futures then began to congest along highs from approximately 22:30 ET on Tuesday night until Wednesday's opening bell. Within that congestion were two major corrections off the highs of the trading range. Each pullback was slower than the previous upswing and the second pullback, which began around 4:00 a.m. ET on Wednesday morning, was slower than the first. This price action favored an upside resolution to the range and it was easier for the indices to push higher out of the open than to attempt a strong selloff.
Although Wednesday's morning rally lasted for over an hour, it was not a significantly strong momentum move and began to falter at 10:35 a.m. ET. By 11:00 a.m. ET the morning channel was beginning to break and selling began in earnest shortly thereafter.
An even stronger continuation to the reversal off the morning highs triggered at noon. This continuation was brief, however, and the index futures held 15 minute 20 period moving average support intraday and climbed up that support level into the closing bell before finally giving way to further weakness afterhours.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a gain of 61.53 points, or 0.5%, and closed at 12,288.17 on Wednesday. Twenty-three of the Dow's thirty index components posted a gain. The strongest performers were JP Morgan Chase (JPM) (+2.39%), Hewlett-Packard (HPQ) (+2.08%), Boeing (BA) (+1.51%), and American Express (AXP) (+1.45%). Verizon Communications (VZ) (-0.80%), Wal-Mart (WMT) (-0.73%), and Cisco (CSCO) (-0.48%) were the weakest.
The S&P 500 ($SPX) rose 8.31 points, or 0.63%, and closed at 1,336.32. The strongest stock in the S&P 500 was Family Dollar (FDO) (+21.13%) after investor Nelson Peltz filed to buy the company. Dell (DELL) (+11.86%) was the second-strongest performer. Abercrombie & Fitch (ANF) (+7.58%) and Dean Foods (DF) (+6.64%) were other top gainers. The weakest were NYSE Euronext (NYX) (-3.67%), Expedia (EXPE) (-2.40%), Devon Energy Corp. (DVN) (-2.13%), and Allegheny Energy (AYE) (-2.05%).
The Nasdaq Composite ($COMPX) ended the session higher by 21.21 points, or 0.76%, on Wednesday and it closed at 2,825.56. Research In Motion (RIMM) (+4.67%), Comcast Corp. (CMCSA) (+4.01%), and NVIDIA (NVDA) (+3.68%) followed Dell (DELL) (+11.86%) as the Nasdaq-100's top percentage performers. Comcast's (CMCSA) earnings also beat expectations. The weakest performers in the index were Expedia (EXPE) (-2.40%), Seagate Technology (STX) (-2.39%), and Ctrip (CTRP) (-2.15%).
Thursday will be a somewhat busy day for data. The weekly jobless claims are due out in the morning, as well as the Consumer Price Index. Then watch for January's leading indicators at 10:00 a.m. ET, along with the Philadelphia Fed survey.
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.