Good day! It's been three days since a devastating 8.9 earthquake hit only a couple of hundred miles off the coast of Japan on Friday and many sectors of the market were heavily influenced by the harsh blow left on the Japanese economy in the aftermath of the destruction. The Japanese Nikkei closed down more than 6% on Monday.
Japan's automakers were among those hit hard. Honda Motor Co. (HMC) (-3.95%), Toyota Motor Co. (TM) (-4.58%), and Nissan (NSANY) (-6.16%) all kicked off the session down at least 5%. In truth, however, the quake was not fully to blame for the auto selloff. It merely accelerated a larger correction that was already underway on the daily and weekly time frames. Shares of these companies hit strong resistance back in February after rallies that began in July-September 2010 ran their course. The companies each opened into support on Monday morning and held the zone of those early-morning lows throughout the remainder of the session.
Dow Jones Industrial Average (Figure 1)
Shares in companies related to nuclear power and uranium producers also struggled on Monday. The region had been expected to expand its nuclear energy stations, but concerns over radiation leaks and a potential meltdown at facilities affected by last week's quake could turn the tide against this form of energy production.
Among the stocks heavily affected by the news were Denison Mines Corp. (DNN) (-22.49), Uranium Energy Corp. (UEC) (-19.18%), Entergy Corp. (ETR) (-4.89%), and General Electric (GE) (-2.16%), who designed the six reactors at the Fukushima Daiichi nuclear plant in Japan. Residents in the around surrounding the nuclear plant were evacuated after reactors shut down following the quake. An explosion also racked one of the building housing a reactor, although authorities stated that the reactor itself remained intact.
General Electric (GE) had been trading in a range just above its 50-day moving average with an AvalancheTM formation on the daily time frame. Although slightly lower lows within the congestion itself over the past several weeks increased risk that a breakdown would not confirm, the added impact of news broke the security cleanly through the lows of the range and the gap confirmed with further selling out of a low-level intraday base around 11:00 a.m. ET. Although it was the Dow's biggest loser, it did recover off afternoon lows to end the session at approximately the same price as its open, but still under Friday's close.
Not all of the reactions were negative. Those stocks deemed likely to benefit from the disaster included solar stocks as an alternative to nuclear power. First Solar (FSLR) (+5.13%), JA Solar (JASO) (+6.02%), and LDK Solar (LDK) (+8.83%) were among the beneficiaries.
S&P 500 (Figure 2)
Although the market had recovered initially following news of the quake in the U.S. markets on Friday, the index futures turned lower once again prior to Monday's opening bell. The intraday trend exhaustion into Friday's upside close helped the futures selloff when trading resumed on Sunday evening in the States, but the pace of the action that followed that correction on the five minute time frame also remained bearish.
The index futures congested near lows on the all-sessions time frames into midnight on Sunday and the momentum on the upside with each bounce within the correction slowed. This resulted in an initial break lower out of the 3:00 a.m. ET correction period on Monday morning, followed by a bounce back into the congestion at 6:00 a.m. ET and subsequent follow through on the downside at 10:00 a.m. ET.
Nasdaq Composite (Figure 3)
The Nasdaq harbored the greatest relative strength out of Monday's open thanks to early-morning gains in technology for the first thirty minutes out of the opening bell. Meanwhile, the S&P 500 and Dow Jones Industrial Average congested while the Nasdaq rose, creating a solid continuation pattern for further selling into mid-day. Once this selloff triggered, it also eroded the Nasdaq's gains.
The indices hit support over noon after establishing a selloff that was comparable to the initial move off Friday's afternoon highs into early Sunday evening's lows (shown in blue). This zone of support hit at 11:30 a.m. ET. Over the next hour the market slowed and followed the 5 minute 20 period moving average. This shifting momentum created an intraday reversal setup on the upside into the early afternoon. It triggered a buy on the 5 minute charts around 12:45 ET and a second wave followed into about 14:30 ET.
Corrective moves often last for two waves and risk can then increase on further attempts to continue unless there is a larger trend reversal underway. The pace of the selloff slowed enough to make this possible and the uptrend managed a third push into the closing bell before reversing once again afterhours to take back all of the afternoon gains.
The Dow Jones Industrial Average ($DJI) had a loss of 51.24 points, or 0.43%, and closed at 11,993.16 on Monday. Seven of the Dow's thirty index components posted a gain. The top performers were Caterpillar Inc. (CAT) (+2.08%), Pfizer Inc. (PFE) (+1.75%), Chevron Corp. (CVX) (+0.87%), and Alcoa Inc. (AA) (+0.56%). The weakest percentage performers were General Electric Co. (GE) (-2.16%), Verizon Communications (VZ) (-1.87%), Disney (DIS) (-1.61%), and McDonalds Corp. (MCD) (-1.38%).
The S&P 500 ($SPX) fell 7.89 points, or 0.6%, and closed at 1,296.39. MEMC Electronic Materials Inc. (WFR) (+11.23%), Tesoro Corp. (TSO) (+6.00), First Solar (FSLR) (+5.13%), and Cabot Oil & Gas Corp. (COG) (+5.00%) were the strongest percentage gainers. The weakest were Coach Inc. (COH) (-5.30%), Tiffany & Co. (TIF) (-5.27%), Entergy Corp. (ETR) (-4.89%), and Owens Ill. Inc. (OI) (-4.23%).
The Nasdaq Composite ($COMPX) ended the session lower by 14.64 points, or 0.54%, on Monday and it closed at 2,700.97. The strongest performers in the Nasdaq-100 were First Solar (FSLR) (+5.13%), Celgene Corp. (CELG) (+1.32%), Stericycle Inc. (SRCL) (+1.21%), and Micron Technology Inc. (MU) (+1.17%). The weakest performers were Seagate Technology (STX) (-2.88%), Warner Chilcott (WCRX) (-2.43%), Netapp Inc. (NTAP) (-2.40%), and Starbucks (SBUX) (-2.27%).
On the docket for Tuesday are the Empire Manufacturing survey for March, February's import and export prices, and the National Association of Homebuilder's March housing market index. Then, in the afternoon the Federal Reserve will announce its latest policy setting. The Fed is expected to keep rates untouched, so the focus will be upon its standing for QE2 (the second round of quantitative easing), which is due to come to an end in June.
The market is still correcting gradually out of the congestion from late February to early March. It's now reaching a critical point for the bulls. In order to get any decent retest of highs to hold the current trend, it will need to kick off that upside this week. The indices have now corrected off last month's highs for approximately the same amount of time as last November's correction. Although the odds are higher that a break to new highs would lead to only slightly higher highs before correcting, instead of a third wave of buying similar to the September-November and December to February moves, the possibility for a third wave of buying lasting a comparable period of time does still remain... as long as this zone of support from this week holds.
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.