Good day! This has been a rough week for the stock market. As I headed out for an early, extended weekend, the tide had not yet turned and the bulls were still holding on and making headlines. My last full day for the week was Wednesday before taking the remainder of the week off for the Traders Expo in New York. At that time, we were starting to see some weakness creep in afterhours last Wednesday, but the overall action had not shifted enough to trigger a strong correction on the daily time frame. In fact, although a number of individual stocks did begin to turn, the market still had a decent session on Thursday and once again hit new highs for the year. This changed dramatically over the weekend.
Dow Jones Industrial Average (Figure 1)
There's been a great deal of speculation over the cause for this week's rapid turn around off multi-year highs. The most commonly cited one is the ongoing unrest and uprisings in Arab countries influenced by the recent revolutionary movements in Egypt. This resulted in the near-immediate resignation of Egypt's President Mubarak.
And now it is particularly the uprisings in Libya that have caught the world's attention and oil and energy shares have been the strongest benefactors in this latest bout of international unease.
Oil hit $100 a barrel as a result of news out of Libya that suggested that as much as half of the country's oil production has been disrupted. Although Libya is not a substantial supplier of oil on the world markets, the political uprisings have been so widespread that concern has been raised regarding the stability of the entire region.
Unsurprisingly, gold has also returned to vogue status in recent weeks.
S&P 500 (Figure 2)
The index futures rolled over off highs once trading resume on Sunday evening. A momentum reversal took place in the indices which triggered a break of the lower end of the uptrend from the past several weeks. Although this week's selloff was triggered on a technical setup, the news abroad, coupled with Tuesday's economic data, did not offer the market any relief.
According to the National Association of Realtors, existing home sales rose unexpectedly in January, but prices fell to their lowest level in nearly nine years. If the current price action holds in fact, then housing prices could very easily break lower once again before having a chance to post any sort of decent recovery.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) had a loss of 107.01 points, or 0.88%, and closed at 12,105.78 on Wednesday. Despite the day's losses, five of the Dow's thirty index components still managed to post a gain. Unsurprisingly, the top two deal with oil. Chevron Corp. (CVX) rose 1.94%, while Exxon Mobil (XOM) followed closely in second with a gain of 1.91%. The biggest loser was Hewlett-Packard (HPQ), which fell 9.62% after it trimmed its 2011 revenue outlook. Intel (INTC) followed with a loss of 3.03%, while General Electric (GE) fell 2.16%, and Home Depot (HD) ended the session lower by 2.07%.
The S&P 500 ($SPX) fell 8.04 points, or 0.61%, and closed at 1,307.40. Cabot Oil & Gas Corp. (COG) was the strongest performer in the index with a gain of 12.43%. Range Res. Corp. (RRC) (+7.38%), Chesapeake Energy (CHK) (+7.25%), and Consol Energy (CNX) (+6.86%) were the other top gainers. Frontier Communications (FTR) (-7.39%), Jabil Circuit (JBL) (-5.98%), and Autodesk Inc. (ADSK) (-5.96%) followed losses in Hewlett-Packard (HPQ) as the index's weakest performers.
The Nasdaq Composite ($COMPX) ended the session lower by 33.43 points, or 1.21%, on Wednesday and it closed at 2,722.99. Vertex Pharmaceuticals (VRTX) (+15.04%), Directv (DTV) (+1.81%), and Apple (AAPL) (+1.18%) were the strongest percentage performers in the Nasdaq-100. The weakest were Dollar Tree (DLTR) (-6.88%), Autodesk (ADSK) (-5.96%), and Illumina (ILMN) (-5.21%).
Although the markets have been in steady downtrend mode throughout this week, that trend is nearing extension on the 60 minute charts and we should start to see the pace stall out on Thursday and have a more difficult time making substantially lower lows throughout the remainder of the week. Any recovery, however, will also be hindered by the fact that the selloff was so much larger than average. Daytrades based upon a sideways market and intraday support and resistance levels for pivot plays will offer the best reward to risk ratios during this time.
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.