Good day! The markets have had quite a difficult time over the past week. The indices have been teasing the bears ever since December, but without giving in. Heading into last week, however, was the first time my swingtrade watch list actually had more than one to two potential plays that I had much confidence in. In fact, about half the stocks on my watch list were on the short side, which hasn't happened in months.
Nevertheless, I still wasn't gung ho on the shorts, nor was I wanting to jump in too early because I simply wasn't sure that any of them would even trigger. This had been the case with most of the patterns for shorts in recent weeks. This time around, they not only held resistance levels, but offered solid triggers with shifting momentum ahead of the setups, confirming that the action we saw at the beginning of the week was very promising for further downside.
Nearly all of that action took place in the first half of the shortened trading week on Tuesday and Wednesday. I hosted a session in New York at this year's Trading Expo that focused on the future of currency price action and although most of it was geared towards larger time frames, one of the topics discussed short-term was the fact that many of the major currencies were also at key levels to begin corrective moves this past week, notably the GBP/JPY, which hit support on Friday after a hard week of selling.
Daily GBP/JPY (Figure 1)
This main focus for the markets over this past week took a turn from earnings to political action overseas. We had already seen how the revolt in Egypt shook things up, particularly in oil, a few weeks ago, but then it spilled over into neighboring Arab countries.
This instability has been increasing in magnitude with regard to the affect it is has had in the markets. An earlier uprising leading to a shift in power in Tunisia barely made waves, but the latest focus rests on Libya, whose leader Muammar el-Qaddafi appears to have no intention of going down without quite a fight.
The rising violence in Libya led the United Nations Security Council to vote unanimously over the weekend in favor of imposing sanctions on the leader and his council. They have also called for an international war crimes investigation stemming from Qaddafi's response to the protests, which led to an estimated death toll in the hundreds.
Oil prices surged to $100 a barrel mid-week this past week. Despite retreating somewhat ahead of the weekend, they remain at that resistance level following strong upward momentum, which typically means that any price correction off this point will be much more gradual.
Dow Jones Industrial Average (Figure 2)
While oil retreated, the overall markets found a foothold. The selloff began to stabilize on Thursday after the Nasdaq struck its 50 day moving average support and the S&P 500 and Dow Jones Ind. Average found support at lower channel levels. Intraday action also pointed towards a correction from the selloff. Sharp moves in the markets rarely last more than 2.5-3 days before they will at least break the 15 minute 20 period moving average for a longer rest.
In this case, the momentum also shifted and a series of slightly lower lows on the 15 minute charts added favor for some sort of recovery. The pace of the selloff, however, make it likely that any recovery will take longer than the selloff and not be able to easily break the previous highs on an initial retest of those levels. The momentum shift, combined with the support levels and degree of the sellof made it easy to anticipate some upside into the weekend, but the intraday action was still fairly erratic and a lot of the strong moves came from individual stocks with fewer decent setups in the overall indices.
S&P 500 (Figure 3)
As the week ended, the bias in the indices was shifting once again on the smaller time frames. The index that caught my eye was the Dow. The Dow futures were establishing a series of slightly higher highs on the 15 minute charts in a variation of a Momentum Reversal. I was working with a client at that time, focusing on this very strategy, and it's always a great learning experience to follow a setup as it unfolds versus trying to go back and put it together after the fact. This reversal pattern triggered in the afternoon, but the closing bell saved the bulls from immediate losses ahead of the weekend. It wasn't enough, however, to prevent the bias from following through once trading resumed on Sunday afternoon and by early evening the strategy was hitting its target. Right now the bias continues to remain in favor of holding the support with the Nasdaq and S&P leading, while the Dow drags.
One way you can take prior price moves in the market and still use them as learning experiences after the fact is to scroll back on your charting, or cover up the latest price action, and advance or uncover it bar by bar as a strategy develops. This will give you a better feel for how it will look as it evolves instead of the more distorted version that seems "obvious" once you view the setup as a whole after it's followed through. I always like to try to use examples of strategies that haven't followed through yet when working with traders (such as the GBP/JPY correction) so that they can follow along as it does. This is always a great confidence builder not only in a system of analysis, but also to use as a great technique for advancing your own skills more quickly than most.
Nasdaq Composite (Figure 4)
The Dow Jones Industrial Average ($DJI) had a gain of 61.95 points, or 0.51%, and closed at 12,130.45 on Friday. Two-thirds of the Dow's thirty index components posted a gain on the day. The strongest were Intel (INTC) (+2.68%), Boeing (BA) (+2.18%), DuPont (DD) (+1.94%), JP Morgan Chase (JPM) (+1.68%), and Bank of America (BAC) (+1.65%). The weakest were Microsoft (MSFT) (-0.82%), Exxon Mobil (XOM) (-0.73%), WalMart (WMT) (-0.65%), and Procter & Gamble (PG) (-0.33%). The Dow ended the week lower by 2.10%.
The S&P 500 ($SPX) rose 13.78 points, or 1.05%, and closed at 1,319.88. The strongest sectors on Friday were the financials, materials, and technology, while energy was the best performer for the week and oil had its strongest week in two years with a gain of 13.7%. Industrials were the weakest. Meanwhile, the strongest individual performers in the index on Friday were Interpublic Group (IPG) (+8.18%), CBS Corp. (CBS) (+6.85%), Rowan Cos. (RDC) (+6.58%), and Valero Energy Corp. (VLO) (+6.57%). The weakest were JC Penney (JCP) (-6.54%), First Solar (FSLR) (-5.44%), American International Group (AIG) (-4.67%), and Perkinelmer Inc. (-4.40%). The S&P 500 ended the week lower by 1.72%.
The Nasdaq Composite ($COMPX) ended the session higher by 43.15 points, or 1.58%, on Friday and it closed at 2,781.05. The top percentage performers in the Nasdaq-100 were Autodesk (ADSK) (+5.74%), Marvell Technology Group (AIG) (+5.05%), Micron Technology (MU) (+4.86%), and Altera Corp. (ALTR) (+4.54%). Autodesk's (ADSK) gains followed its earnings report, which included a 23% increase in profit. The weakest were First Solar (FSLR) (-5.44%), Netflix (NFLX) (-1.27%), and Microsoft (MSFT) (-0.82%). First Solar (FSLR) announced that it expected weaker sales this year and would be cutting its prices after European subsidies expired. The Nasdaq Composite ended the week lower by 1.87%.
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.