Good day! Since Friday the market has been in a recovery mode, pulling steadily off last week's lows. The S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) have both held a gradual uptrend channel on the 60-minute charts throughout the week, while the stronger Nasdaq-100 ($NDX) rounded off at lows and gained upside momentum as the week progressed. The Dow was striking the upper end of its 60-minute channel when Tuesday's session wound to a close, leaving it overbought on a 15 minute time frame while the Nasdaq-100 was dealing with equal move price resistance on the 15 minute time frame. This left the indices extended in the short-term, but still within a larger daily trading range heading into early Wednesday morning.
Dow Jones Industrial Average (Figure 1)
The bulls received a hit prior to the open between 5-6:00 a.m. ET when both the Dow and S&P 500 attempted a premature breakout to new highs on the week. This created a double top on the 15 minute time frame that I call a 2T and is a form of a trap since slightly higher highs trap overzealous bulls only to flush them out once again. This type of 2T is common following the type of trend the Dow experienced on Tuesday which consisted of a series of three highs, each slightly higher than the last, after a larger initial rally.
The premarket reversal had a bit of help. The Bank of England signaled that it would likely raise its key lending rate prior to the end of the year in order to combat rising inflationary pressures. The European Central Bank raised its rates for the first time since the start of the current economic crisis about a month ago, and although it is not planning on another rate increase in June, it has not ruled out increasing the official borrowing costs later in the summer. This has sparked further debate in the U.S. regarding our own Fed's intentions. Despite rhetoric that inflation remains under control, food and energy costs have been rising sharply in recent quarters.
S&P 500 (Figure 2)
Wednesday's premarket reversal picked up steam heading into the opening bell. On the 15 minute chart of the ES (S&P 500 eMini) a series of three waves of selling are visible. The first consisted of the original reaction out of the 2T. The second took place heading into the open. It found support at the 15 minute 200 sma, but by 11:30 a.m. ET a third wave was under way. The second wave of selling had been stronger than the first. This indicated increasing momentum on the trend and it's common to see a third wave that is even stronger than the second. This lasted into 12:30 ET.
Although the market continued to base along lows on the 5 minute time frame, by 12:15 ET the morning trend was extended. A 2-wave bear flag formed heading into the 5 minute 20 sma, but the larger trend exhausted prevented it from offering the typical rewards of a bear flag. Instead, the attempt only led to slightly lower lows and the market spent the remainder of the session in a trading range on the 5 minute time frame.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) ended the day with a loss of 130.33 points, or 1.02%, and closed at 12,630.03 on Wednesday. Only five of the Dow's thirty index components posted a gain on the day. The top three were Intel (INTC) (+1.65%), Johnson & Johnson (JNJ) (+1.23%), and Proctor & Gamble (PG) (+0.29%). The weakest performer was Disney (DIS) (-5.44%), whose earnings were met with disappointment following Tuesday's close. It reported earnings of 49 cents a share compared to the 57 cents anticipated. Alcoa (AA) (-2.68%), Caterpillar (CAT) (-2.56%), DuPont (DD) (-2.45%), and Exxon Mobil (XOM) (-2.11%) were also at the top of the day's decliners.
The S&P 500 ($SPX) fell 15.08 points, or 1.11%, and closed at 1,342.08. Macy's (M) (+7.71%) led the S&P 500's gainers following earnings. Other top percentage performers included American Intl. Group (AIG) (+3.48%), Dr Pepper Snapple Group (DPS) (+2.77%), Dell (DELL) (+1.95%), and Adobe (ADBE) (+1.87%). Yahoo (YHOO) (-7.28%) was the largest percentage decliner in the S&P 500. Other top decliners included Cabot Oil & Gas (COG) (-5.74%), Freeport McMoran Copper & Gold (FCX) (-5.56%), and Disney (DIS) (-5.44%).
The Nasdaq Composite ($COMPX) ended the session lower by 26.83 points, or 0.93%, on Wednesday and it closed at 2,845.06. The strongest performers in the Nasdaq-100 were Teva Pharmaceuticals (TEVA) (+3.20%), Dell (DELL) (+1.95%), Adobe (ADBE) (+1.87%), Ross Stores (ROSS) (+1.65%), and Intel (INTC) (+1.65%). Yahoo (YHOO) (-7.28%) was the largest percentage decliner, followed by Joy Global (JOYG) (-4.06%), First Solar (FSLR) (-3.28%), and Mylan Inc. (MYL) (-2.60%).
Cisco Systems (CSCO) reported earnings after Wednesday's close of 42 cents a share, beating estimates for 37 cents a share. Nevertheless, it warned of a quarter and shares were lower afterhours.
Kohl's (KSS) and Nordstrom (JWM) are among the earnings announcements to keep an eye on for Thursday. NVIDIA (NVDA) also reports after the close on Thursday.
Wednesday's price action was definitely not pretty for the bulls. Commodities were also once again a big drag on the market. Gold, silver, and oil all took back gains from their reactions to Friday's support. The indices should ideally rest here longer on the 60 minute charts before they would be ready for a strong continuation on the downside, so this leaves me more in daytrade mode on Thursday.
A few economic reports left to keep an eye on this week will include April's retail sales data on Thursday, and April's consumer prices 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.