Good day! Trading has been very mixed over the past week with a number of securities still strongly on the rise even though the overall rally in the U.S. indices has been weakening. So far this week, the bias I put forth over the weekend has held extremely well. We've seen a lot of securities rounding off at highs, leading to increased reversal action into the second half of the week, but strength in a number of commodities haves also saved a lot of action for the bulls.
Overall volume remains light in the market, keeping investors on edge. Trend extension on light volume without much potential for strong upward, market-moving news means that when the indices do start to retreat, they can do so very quickly. This is what we've seen with the Momentum ReversalsTM that have been triggering left and right over the past several days. MKS Instrument (MKSI) is one example on the daily time frame that triggered on Thursday and still has a lot of room on the downside.
Dow Jones Industrial Average (Figure 1)
Heading into Thursday morning, many eyes were eastward towards Europe and the European Central Banks' interest rate decision. As anticipated, the ECB chose to raise its key interest rates by 25 basis points to 1.25%. The Bank of England, however kept its key rates at 0.5% despite rising inflation. The news did not have much of an impact on the U.S. index futures and prices were relatively flat heading into Thursday's opening bell.
All that changed within an hour of the open when news reached the wires of another earthquake in Japan. Originally reported at a 7.4, the quake was downgraded to a 7.1. The market fell sharply on the news heading into 10:15 a.m. ET and retested that zone again into 11:30 a.m. ET. Once it became apparent that the aftermath was nowhere near that of March's devastating earthquake and subsequent tsunami, prices retreated somewhat off lows, but the underlying weakness that was already plaguing the market this week remains and participation in the afternoon recovery was light.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) had a loss of 17.26 points, or 0.14%, and closed at 12,409.49 on Thursday. Twelve of the Dow's thirty index components posted a gain. The top performers were Home Depot (HD) (+0.88%), Boeing (BA) (+0.77%), Exxon Mobil (XOM) (+0.68%), and Procter & Gamble (PG) (+0.60%). The weakest performers were Caterpillar (CAT) (-1.04%), General Electric (GE) (-0.97%), McDonalds (MCD) (-0.93%), and Cisco Systems (CSCO) (-0.89%).
The S&P 500 ($SPX) fell 2.03 points, or 0.15%, and closed at 1,333.51. The strongest individual performer in the index was Bed Bath & Beyond (BBBY), which rose 10.45% following earnings. Most of that gain took place before the market even opened, however, leaving very little opportunity for intraday traders hoping to catch in on the run. Other top percentage gainers in the S&P included Constellation Brands (STZ) (+6.92%), Costco Wholesale Corp. (COST) (+3.77%), NVIDIA (NVDA) (+3.67%), and Newmont Mining (NEM) (+3.26%). The weakest performers were KLA-Tencor (KLAC) (-4.57%), Novellus (NVLS) (-3.57%), International Game Technology (IGT) (-3.42%), and JDS Uniphase (JDSU) (-3.01%).
Nasdaq Composite (Figure 3)
The Nasdaq Composite ($COMPX) ended the session lower by 3.68 points, or 0.13%, on Thursday and it closed at 2,796.14.Bed Bath & Beyond (BBBY) (+10.45%), Costco Wholesale Corp. (COST) (+3.77%), and NVIDIA (NVDA) (+3.67%) also led the Nasdaq-100, but so did Ctrip.com (CTRP) (+2.90%) and Apollo Group (APOL) (+2.14%). the weakest performers were Lam Research (LRCX) (-4.97%), KLA-Tencor (KLAC) (-4.57%), Cerner Corp. (CERN) (-2.68%), and Netflix (NFLX) (-2.50%), which fell off a daily and weekly double top.
Despite the action in the market right now that shows signs of weakness, use caution on the indices. Instead, look for securities that are showing stronger reversal patterns than the overall market and don't be afraid to still go after intraday pockets of strength. There's going to be a lot of hesitation heading into earnings season and the market itself may wait until that kicks off before making up its mind. This has often been the case in the past. Earnings season begins on April 11th with the release of Alcoa's quarterly earnings report.
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.