Good day! Wednesday was an active day for the market as the week's data started to mount. It kicked off in premarket trade with the ADP National Employment Index, which showed that the private sector created 179,000 jobs last month. This was less than what analysts had been anticipating, but it didn't have a strong impact on price action in the index futures. This is not unusual. Friday's employment data will be much more likely to generate a stronger reaction. The Labor Department will also release last week's jobless claims on Thursday morning.
Dow Jones Industrial Average (Figure 1)
When the opening bell rang on Wednesday, the market was relatively unchanged compared to Tuesday's close. This relative peacefulness did not last long. The next data to hit the wires was the Institute for Supply Management's nonmanufacturing index, which fell unexpectedly from 57.3 in March to 52.8 last month. Analysts had been expecting a reading of 57.4. This dramatic decline to an 8-month low hit the market hard.
The indices fell sharply on the news to new lows for the week before slowing at support from a 50% retracement level in the Dow (YM) compared to last week's rally, a 62% fibonacci retracement in the S&Ps (ES), and a 100% retracement in the Nasdaq-100 (NQ). At that point the pace of the sharp selloff diminished although the trend continued into the early afternoon.
The slowdown in the momentum of the morning's selloff set the tone for the afternoon recovery that followed. In the S&P 500 and Dow Jones Industrial Average, a strong reversal pattern I call a Momentum Reversal took place. This happens when a sharp selloff is followed by a series of slightly lower lows that create a type of bear trap. It triggered a buy when the downtrend channel broke to the upside. This took place heading into the 13:00 ET correction period.
S&P 500 (Figure 2)
The Nasdaq's reversal pattern was different than the pattern that formed in the other two indices, but it was a strong one. The Nasdaq-100 established three waves of selling throughout Wednesday morning on the 5 minute time frame, which exhausted the downtrend. A longer correction followed into noon before a final flush into the 13:00 ET correction period. This final flush hugged the zone of the 5 minute 20 sma and led to only a slightly lower low on lighter volume than the selloff into the morning low. All of these point to a reversal pattern in the making. The reversal itself took place all of the day's losses, but ran into resistance around 14:30 ET, leading to a slight loss once again prior to the closing bell.
Barring further disappointing data, however, the market is at enough support that there is room for further recovery action on the 15 minute time frame heading into Thursday. The data is still going to serve as the leader this week, however.
The Dow Jones Industrial Average ($DJI) ended the day with a loss of 83.93 points, or 0.66%, and closed at 12,723.58 on Wednesday. Eight of the Dow's thirty index components posted a gain on Wednesday. The top performers were Intel (INTC) (+1.95%), Hewlett-Packard (HPQ) (+1.51%), Procter & Gamble (PG) (+1.16%), and Microsoft (MSFT) (+0.98%). The biggest losers were Caterpillar (CAT) (-2.21%), General Electric (GE) (-1.79%), DuPont (DD) (-1.73%), and Chevron (CVX) (-1.40%).
Nasdaq Composite (Figure 3)
The S&P 500 ($SPX) fell 9.30 points, or 0.69%, and closed at 1,347.32. The strongest percentage performers are CBS Corp. (CBS) (+7.81%), Novellus Systems (NVLS) (+6.50%), Allergen Inc. (AGN) (+3.66%), Conagra Foods (CAG) (+3.07%), and Medco Health Solutions (MHS) (+2.93%). All 10 of the index's industry sectors posted a loss. Energy and materials shares were the hardest hit. The weakest performer in the index was Quanta Services Inc. (PWR) (-10.78%) following earnings. Other top decliners included Harris Corp. (HRS) (-8.38%), First Solar (FSLR) (-6.20%), and Tenet Healthcare Corp. (THC) (-4.71%).
The Nasdaq Composite ($COMPX) ended the session lower by 13.39 points, or 0.47%, on Wednesday and it closed at 2,828.23. The top percentage performers in the Nasdaq-100 were Garmin Ltd. (GRMN) (+5.34%), Virgin Media (VMED) (+3.31%), Akamai Technologies (AKAM) (+2.66%), and Intel (INTC) (+1.95%). The weakest were First Solar (FSLR) (-6.20%), Millicom Intl. Cellular (MICC) (-2.95%), Oracle Corp. (ORCL) (-2.46%), and Comcast Corp. (CMCSA) (-2.44%).
Earnings reports to keep an eye on throughout the remainder of this week are Kellogg (K), News Corp. (NWSA), and Transocean (RIG) on Wednesday; Kraft Foods (KFT) and Sara Lee (SLE) on Thursday; and Washington Post (WPO) and Weight Watchers (WTW) on Friday.
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.
