Good day! Light volume and overhead resistance in the indices on the daily time frame increased the risk on the long side heading into Monday's trading session. Although a number of individual shares continued to push higher and both the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) still managed to end the session in the black, the weakening trend remained highly evident. This was particularly the case in the Nasdaq.
Semiconductors weighed heavily on the Nasdaq on Monday following a report on falling sales. Afterhours, however, it was announced that Texas Instruments (TXN) intends to acquire National Semiconductor (NSM) for $6.5 billion, which is a premium of roughly 4 times sales. The Nasdaq-100 index futures jumped on the news and reclaimed the day's losses.
Dow Jones Industrial Average (Figure 1)
As we headed into Monday morning, my bias was primarily in favor of daytrades with a view that risk would be higher on new swingtrade setups on the upside, although the market may not be quite ready for any strong pullback in price. This bias was reflected in the relatively mixed trading that took place throughout the session. Overall, however, the bears led throughout most of the day following a rally in the early-morning hours in premarket trade.
Slightly higher highs ahead of the open on the 15 minute charts slowed the pace of the rally and gave the bears something to work with. The clearest short trigger was in the Nasdaq futures coming out of 9:15 a.m. ET shortly ahead of the opening bell. Meanwhile, the S&P 500 futures formed a third high on the 15 minute chart soon after the opening bell which created a Momentum ReversalTM short off morning highs. This can be seen the most clearly on the 15 minute chart of the ES in Figure 2.
Interestingly, most of the swingtrade setups on the short side heading into the new week also fell into the category of Momentum Reversals. Among the examples are LLTC, WMB, and JCI on the 60 minute charts.
Although the market remained weak throughout the morning, the indices found support at the 14:00 ET correction period. The S&P index futures were striking previous lows at that point, while the Nasdaq-100 was closing the gap from March 30th, and the Dow was coming into its 5 and 15 minute 200 sma. The pace of the selloff into that zone of support, however, left room for another 5 minute attempt to pull lower off the 20 sma into 15:00 ET. Instead, the indices hugged that zone and popped once again into the closing bell.
My bias heading into Tuesday is as relatively unchanged as the market on Monday. the daily trend is weakening, but strong reversals on the larger time frames are still sketchy overall. This makes it a more ideal environment for daytraders, but continue to watch for developing weakness in individual shares relative to the overall market. Securities that rise at a slower pace with the overall market will often have a stronger reversal when the overall market stalls.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) had a gain of 23.31 points, or 0.19%, and closed at 12,400.03 on Monday. The Dow had the best relative strength for the day and two-thirds of its thirty index components posted a gain after the overall index traded in a narrow range throughout the session. The top performers were Johnson & Johnson (JNJ) (+1.11%), WalMart (WMT) (+1.00%), and General Electric (GE) (+0.93%). One-third posted a loss. The weakest were Hewlett-Packard (HPQ) (-1.56%), Intel (INTC) (-1.17%), and Disney (DIS) (-0.51%).
The S&P 500 ($SPX) rose 0.46 points, or 0.03%, and closed at 1,332.87. The strongest percentage performers in the index were Mastercard Inc. (MA) (+3.04%), Tesoro Corp. (TSO) (+3.30%), Iron Mountain (IRM) (+2.89%), and Ford Motor Co. (F) (+2.57%). The weakest percentage performers were General Dynamics (GD) (-5.23%), Netapp Inc. (NTAP) (-5.19%), Supervalu (SVU) (-4.09%), and Juniper Networks (JNPR) (-3.64%).
Nasdaq Composite (Figure 3)
The Nasdaq Composite ($COMPX) ended the session lower by 0.41 points, or 0.01%, on Monday and it closed at 2,789.19.The top performers in the Nasdaq-100 were Baidu Inc. (BIDU) (+3.08%), Ctrip.com (CTRP) (+2.86%), and Sandisk (SNDK) (+2.40%). Netapp Inc. (NTAP) (-5.19%), NVIDIA (NVDA) (-2.58%), and First Solar (FSLR) (-2.58%) were the weakest.
One of the few economic reports to be released this week will be the Institute for Supply Management's Services Index on Tuesday. It's also expected to show continuing strength in manufacturing.
Earnings season unofficially kicks off on April 11th with Alcoa's (AA) first quarter report. In the meantime, attention will be focused on the European Central Bank, which is expected to raise its benchmark interest rate from 1% to 1.25% to combat rising inflation. The U.S. Federal Reserve could easily take this cue to begin raising rates before the end of the year as well. The next FOMC meeting will be held April 26-27th.
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.