Good day! Trading was mixed on Thursday with lighter volume than throughout the first half of the week, but from a technical standpoint it was a very good day to be a daytrader. The intraday action was very smooth with nearly textbook style movements throughout the session.
As Thursday began, we were initially looking at the premarket trade. The index futures in the Dow Jones Ind. Average (YM) and S&P 500 (ES) had already formed two strong waves of buying on Tuesday and Wednesday and two periods of congestion afterhours following each of the rallies. This left the market poised for a potential third move to the upside into Thursday morning. The breakout confirmed shortly before 6:00 a.m. ET and continued further on the early-morning jobs data, which was stronger-than-expected.
Dow Jones Industrial Average (Figure 1)
According to the Labor Department, first-time unemployment claims last week fell by 29,000 to 409,000. Continuing claims fell 81,000 to 3.711 million from 3.792 million. Claims had been rising in recent weeks and the initial reaction to Thursday's report was positive, although hesitation began to appear even before the opening bell.
It wasn't until the 10:00 ET existing home sales report hit that the market really began to show its unease. The opening highs in the market were already dealing with resistance on the 15 minute time frame from earlier in the week. The Nasdaq-100 (NQ) was even pushing into its 200 sma. The housing report was projected to show an increase to 5.22-5.23 million in April in existing home sales from 5.10 million in March. Instead, existing home sales fell 0.8% to 5.05 million from a revised 5.09 million in March. The indices fell immediately.
The initial wave of selling off morning highs found support at the 5 minute 20 sma and the closure of the day's opening gap in the indices. This hit at the 10:15 a.m. ET correction period. A second wave of selling followed, which is typical after a market-moving news event intraday. This time, however, the pace of the selloff was more gradual than the initial downside reaction. This shift in momentum wllowed the market to hold its lower trend channel on the 15 minute charts intraday, although the intial reaction to support was minor.
S&P 500 (Figure 2)
A continued shift in momentum throughout the remainder of the morning set the market up for a larger recovery into the early afternoon. After breaking the channel on the 5 minute charts from the second wave of selling into 11:15 ET, the indices hugged the 5 minute 20 period moving averages. As they did so, volume declined. This created a strong PhoenixTM buy strategy that triggered into the 12:00 (noon) correction period.
A sharp wave of buying was followed by two more pushes to the upside to create a series of slightly higher highs into 14:00 and the price resistance from the beginning of the day, resulting in the next pattern for the day: a Momentum ReversalTM. This short strategy returned the market to the lower end of the intraday trading range, but the rapid back and forth action throughout the session kept the market confined to a trading range into the closing bell.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) ended the day with a gain of 45.14 points, or 0.36%, and closed at 12,605.32 on Thursday. Nineteen of the Dow's thirty index components ended the session in positive territory. The top performers were American Express (AXP) (+1.49%), McDonalds (MCD) (+1.24%), Boeing (BA) (+1.14%), and United Technologies (UTX) (+1.09%). The weakest performers were Intel (INTC) (-1.42%), Hewlett-Packard (HPQ) (-0.99%), Bank of America (BAC) (-0.85%), and Pfizer (PFE) (-0.71%).
The S&P 500 ($SPX) rose 2.92 points, or 0.22%, and closed at 1,343.60. The top percentage performers in the index on Thursday were Thermo Fisher Scientific (TMO) (+4.21%), Tellabs (TLAB) (+3.30%), Intuit (INTU) (+2.98%), and Masco Corp. (MAS) (+2.98%). Big Lots (BIG) was the top percentage decliner, falling 10.52% after it announced that it would not be making itself available for a buyout. Other top decliners included Limited Brands (LTD) (-3.86%), KLA-Tencor Corp. (KLAC) (-3.78%), and Coventry Health Care (CVH) (-2.80%).
The Nasdaq Composite ($COMPX) ended the session higher by 8.31 points, or 0.3%, on Thursday and it closed at 2,823.31. The top performers in the Nasdaq-100 ($NDX) were Ctrip.com (CTRP) (+3.51%), Baidu (BIDU) (+3.06%), Intuit (INTU) (+2.98%), and Dollar Tree (DLTR) (+2.90%). The weakest were KLA-Tencor (KLAC) (-3.78%), O'Reilly Automotive (ORLY) (-2.66%), Research In Motion (RIMM) (-2.64%), and Sears Holdings (SHLD) (-2.62%).
The correction off this month's highs in the indices is comparable to the correction off March highs into mid-April. This leaves the market with the potential for a third push to the upside on the daily time frame, particularly in the S&P 500 and Dow. Weekly extension, however, increases the risk of such a play. Nevertheless, I am not finding particularly strong short setups on the daily charts despite having scanned through the entire S&P 500 this evening.
Daily congestions such as in Qualcomm (QCOM) certainly have room for another push to the upside, but most of these ideally need a slower pullback off the upper end of the 60-minute channel before they attempt to break higher in order to reduce the risk of a bull trap. Similar securities include CHRW, NSC, MMC, WAT, SBUX, UNM, abd BLK. These will be on my watch list heading into the weekend and next week. DNR, although not a breakout, has a two-wave correction on the daily chart that is similar to the 5 minute charts we saw of the indices Thursday morning and will also be on my watch list.
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.