NOTICE: I'll be on vacation from Wednesday, April 13 to Monday, April 18th. This column will resume Monday evening.
Good day! The market has spent the past week coming to terms with the extended upside move of the rally off mid-March lows. Throughout the week we've seen the type of action I wrote about heading into it play out. The momentum shifted in many securities, creating a rounded affect at highs that served to trap bulls, leading to some strong pullbacks into the second half of the week.
It hasn't all been all peachy for the bears though. In fact, many securities held up well throughout the week, particularly those tied to gold, silver, and oil, as well as the semiconductors. Silver continued to hit record highs not seen since 1980, while gold hit new all-time highs and oil continued its upside breakout to multi-year highs. Gold traded as high as $1,476.20 an ounce on Friday, while silver hit $40.608 an ounce. Gold was up 3.2% for the week, while silver was up 7.6%. Crude oil hit $2.49 a barrel on Friday, while gasoline prices rose to $3.730 a gallon.
Dow Jones Industrial Average (Figure 1)
Many stocks teased both the bulls and the bears as they ricocheted back and forth between the week's highs and lows. MKS Instrument (MKSI), which I wrote about Thursday evening, was one example. It slowed and began to sell off at the beginning of the week, but went for a slightly higher high mid-week before finally relenting to a stronger selloff on Thursday and Friday.
The week was full of false breakouts on the upside as well. Kennametal Inc. (KMT) triggered a strong Phoenix buy setup on Wednesday, for example, before falling back with the rest of the market into the weekend.
The indices themselves have been taunted by both sides. Steep selloffs have been met with equally strong recoveries and even a series of slightly higher highs in the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI).
S&P 500 (Figure 2)
It wasn't until Friday that we saw the bearish bias that had been developing into last weekend really begin to offer confirmation in the overall market. It started with the steep drop on Thursday morning following news of another earthquake off Japan, but the recovery off Thursday's lows marked the first major shift in momentum within the larger trading channel for the week.
The market's recovery was extremely gradual off Thursday's lows. Even though the indices managed to retake prior highs in the early-morning hours on Friday, the momentum of the recovery never increased as it had in the recoveries that took place throughout the earlier part of the week. Instead, it remained steady and slower than the prior breakdown. This added strength to earlier highs as resistance and gave the bears a huge advantage heading into Friday's opening bell.
Nasdaq Composite (Figure 3)
Once the uptrend channel heading into Friday's opening bell broke on the downside, the selling remained strong. The indices paused to catch their breath mid-day, but based at intraday lows on light volume before triggering a continuation out of the 14:00 ET correction period. This breakdown gained momentum over the next hour, but the indices cut their losses in the final hour of trade.
The market is going to continue to face pressure from the bears this week. Even though many of the breakdowns that triggered mid-week are at short-term support, others are just getting started, such as Cliffs Natural Resources (CLF) and a rest on the 15-30 minute charts should be all they need for continuation action. Others, such as Qualcomm (QCOM) are still stuck in the range of the past several weeks, but continuing to show weakness. Keep an eye on daily formations such as this for breakdowns in the week ahead.
Earnings season will also be kicking off this week with Alcoa (AA) reporting after the close on Monday. Fastenal (FAST) follows on Tuesday prior to the open, while JP Morgan Chase (JPM) reports Wednesday morning, and Google (GOOG) reports after Thursday's close.
Major economic reports to watch for this week include the Mortgage Bankers Association's report on mortgage applications and the Federal Reserve's Beige Book on Wednesday. On Friday eyes will be on the Empire Manufacturing Index and the University of Michigan's Consumer Sentiment Index.
In addition to earnings, the ongoing budget debate is going to continue to grab headlines this week. The federal government narrowly missed a shut-down over the weekend thanks to a last minute bill that passed shortly after midnight on Friday, but this was yet another in a string of such extensions and the progress made to curtail government spending so far is tantamount to a drop in the bucket of what is needed to really rein in government spending and reduce the deficit.
A government shut-down would be quite harmful to this fragile economy and could mean everything from delayed wages to soldiers to closure of the national parks. The larger impact would be deepening distrust by the American people. Let's not also forget that there is also still the 2012 fiscal budget to deal with. Although these are the current headlines, another looms right behind them.
The Treasury Department estimates that the country's legal borrowing limit will be reached by May 16th. If this limit is not addressed, the government could easily begin defaulting on its debt, which has even greater consequences than a government shut-down. It's enough to make anyone with any money in the markets more than a bit cautious and earnings will still be light this week, so last week's lack of confidence is going to continue to be the theme this week as well.
The Dow Jones Industrial Average ($DJI) had a loss of 29.44 points, or 0.24%, and closed at 12,380.05 on Friday. Eight of the Dow's thirty index components posted a gain. The top performers were Merck (MRK) (+1.02%), Chevron Corp. (CVX) (+0.66%), Pfizer (PFE) (+0.64%), and AT&T (T) (+0.56%). The weakest were Cisco Systems (CSCO) (-1.45%), JP Morgan Chase (JPM) (-1.18%), Boeing (BA) (-1.10%), and Alcoa (AA) (-1.10%). The Dow ended the week higher by 0.03% for a year-to-date gain of 6.93%.
The S&P 500 ($SPX) fell 5.34 points, or 0.4%, and closed at 1,328.17.The strongest individual performer in the index was Expedia Inc. (EXPE) (+12.95%) on news that it plans to spin off its TripAdvisor business. Other top performers were Supervalu (SVU) (+3.86%), Limited Brands (LTD) (+3.83%), Nabors Industries (NBR) (+3.48%), and Western Digital Corp. (WDC) (+2.65%). The weakest percentage performers were Masco Corp. (MAS) (-3.73%), Tesoro (TSO) (-3.34%), Archer Daniels Midland (ADM) (-3.29%), and Harman Intl. (HAR) (-3.17%). The S&P 500 ended the week lower by 0.32% and is up 5.61% year-to-date. The strongest sectors for the week were gold, energy, semiconductor and retail. The weakest were real estate, homebuilding, transportation, and banking.
The Nasdaq Composite ($COMPX) ended the session lower by 15.72 points, or 0.56%, on Friday and it closed at 2,780.42. It ended the week lower by 0.33% and up 4.81% year-to-date. The top percentage gainers in the Nasdaq-100 were Expedia (EXPE) (+12.95%), Seagate Technologies (STX) (+7.83%), Vertex Pharmaceuticals Inc. (VRTX) (+2.66%), and Baidu (BIDU) (+2.66%). The weakest performers were NVIDIA (NVDA) (-3.04%), Paccar Inc. (PCAR) (-2.86%), Sandisk Corp. (SNDK) (-2.68%), and Staples Inc. (SPLS) (-2.36%).
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.