Good day! The U.S. markets took a backseat on Friday as the nation awoke to news that a devastating 8.9 earthquake hit off the coast of Japan. The Japanese market fell sharply and U.S. index futures, which were already weak, took another hit in the early morning hours as the news hit the wires. The death toll is estimated to be in the thousands with approximately 1,600 confirmed to date, while the economic damage in Japan alone is estimated at over $100,000 billion. The impact of Friday's quake was also felt in the States with tsunami's hitting the west coast.
Dow Jones Industrial Average (Figure 1)
After the initial blow, the U.S. index futures stabilized. The sharp selloff around 1:00 a.m. ET was similar to the selloff into Thursday morning and the market found support rather quickly. The next several hours were spent absorbing the news. The pace gradually shifted in favor of the bulls and Friday's session began without a noticeable impact. Most of the morning was still slow, however, and the indices spent several hours stuck in a narrowing range following the opening bell.
Volume dropped as the congestion tightened, emphasizing an imminent breakout. The pace within the congestion itself also began to further develop a strong breakout bias in favor of the upside. The trigger took place shortly before 11:00 a.m. ET, leading to the first wave of intraday buying in Friday's session. It was not the last. congestion mid-day broke to the upside as well, triggering around 14:00 ET. This second push lasted until the 15:30 ET correction period. At that point it was contending with strong price resistance after establishing an afternoon move of comparable magnitude as the one that took place in the second half of the morning.
S&P 500 (Figure 2)
Although Japan's quake was the top headline for the day on Friday, the action that played out in the indices was also perfectly in line with the technical expectations I'd outlined throughout the week. After falling sharply off highs to kick off March, the indices fell into a period of congestion. The manner in which the congestion formed suggested that the breakdown out of it would not be as strong as the initial downside move several weeks earlier. Friday's intraday recovery further confirmed the slower pace of the larger 60-minute breakdown and leaves the market open for another attempt at highs this spring.
For the most part, I'm favoring the bulls this week, but this could get off to a tricky start. The intraday momentum is not quite ideal for a rapid recovery off support, so we could still see some choppy action as the week begins. We also have the FOMC meeting on Tuesday to watch out for, along with a slew of economic events this week that can also impact the short-term price action.