Good day! The market continued to struggle in Monday's session after a rocky week of trading to kick off the month of March. The bias heading into the day was still favoring the bears as I was writing yesterday's column and the premarket action in the index futures continued to do so as well. The indices actually broke higher around 3:00 a.m. ET on Monday morning, but this merely kicked off a second wave of corrective action off Friday's afternoon lows. As long as the overall momentum of the two waves remains more gradual than the previous drop, there is still a strong probability that the selling will resume.
Although the momentum attempted to increase initially on Monday morning, a series of slightly higher highs followed. We've seen this type of action a great deal recently and even in yesterday's column I explained that this is a bearish style of price formation.
Dow Jones Industrial Average (Figure 1)
All three of the major indices had strong sell setups trigger into Monday's opening bell. The S&P 500 and Dow Jones Ind. Average futures each formed Momentum Reversals after three highs in premarket trade, while the Nasdaq formed a Head & Shoulders pattern. Both patterns are strong reversal strategies. When the channel of the right shoulder breaks on a Head & Shoulders pattern, this triggers my short, as opposed to a traditional "neckline break".
Most technical analysis textbooks or websites will teach you to draw a line connecting each low on each side of the "head" (highest high) of the pattern (aka "the neckline) and then take a short as that line breaks lower. This is a higher risk entry. It was at this point that the momentum on the downside increased dramatically on Monday, but it was also a much later and higher risk entry than using the shoulder's break in a strategy I call an AvalancheTM.
The selling on Monday was very decisive and continued into the early afternoon before finally striking support at the lower end of the 60-minute trading channel. This was also equal move support in the S&P 500 and Dow futures as compared to Friday's descent. All in all, the market has held the original bias I wrote about over a week ago and continued to trade within a larger daily trading range as it reacted to the daily support from February 24th. The possibility remains that this congestion can break down further in the week ahead since the momentum has yet to shift in order to suggest otherwise on the smaller 30-60 minute charts.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) had a loss of 79.85 points, or 0.66%, and closed at 12,090.03 on Monday. Only four of the Dow's thirty index components posted a gain. All gains were fractional. The gainers were McDonalds (MCD) (+0.34%), 3M (MMM) (+0.23%), General Electric (GE) (+0.05%), and Coca-Cola (KO) (+0.02%). The biggest losers were Alcoa (AA) (-1.99%), Intel (INTC) (-1.62%), Hewlett-Packard (HPQ) (-1.48%), and Boeing (BA) (-1.28%).
The S&P 500 ($SPX) fell 11.02 points, or 0.83%, and closed at 1,310.13. The strongest percentage performer in the index was Western Digital Corp. (WDC) (+14.56%). WDC's gains were followed by Intercontinental Exchange (ICE) (+3.43%), Sprint Nextel (S) (+3.23%), and Harley Davidson (HOG) (+2.52%). JDS Uniphase (JDSU) was the index's top percentage decliner. It fell 6.87% and swiftly wiped out most of Friday's gains. Other top decliners included Teradyne Inc. (TER) (-5.37%), Micron Technology (MU) (-5.24%), Applied Materials (AMAT) (-4.60%), and F5 Networks (4.50%).
The Nasdaq Composite ($COMPX) ended the session lower by 39.04 points, or 1.4%, on Monday and it closed at 2,745.63. Seagate Technology (STX) (+9.00%) was the strongest stock in the Nasdaq-100. Starbucks (SBUX) (+1.45%) and Expedia (EXPE) (+1.06%) also added more than 1% on the day. Nine-tenths of the index's components posted a loss. The weakest performers were Micron Technology (MU) (-5.24%), Applied Materials (AMAT) (-4.60%), and F5 Networks (4.50%).
Nasdaq Composite (Figure 3)
Headlines on Monday also once again focused upon the commodities. Oil, gold, and silver were all on the rise. Oil nearly tested $107 a barrel and closed at $105.44, while this continued to push retail gasoline higher. Unleaded gasoline averaged $3.509 a gallon compared to $3.471 on Friday. Gold set a new intraday record high of $1,445 an ounce and settled at $1,434.50 on the Chicago Mercantile Exchange. Silver settled at $36.12 after striking another 31-year high of $36.74 an ounce. These commodities will continue to be in focus as internal strike in Arab countries with vast oil supplies and infrastructure continue.
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.