Good day! If you're a bull, Tuesday's session was a nice surprise coming back from the holiday weekend. The index futures spent Sunday evening and most of Monday trading in a narrow range, but broke higher in the evening. This breakout continued strongly into the early-morning hours on Tuesday due to strength overseas that accompanied news that Greece has a chance at restructuring at least some of its debt. It resulted in a strong upside gap into Tuesday's opening bell.
The trouble with the gap itself, however, was that it was so large that it left the market extended even before regular trade began. Most of the daily breakout strategies I'd been watching jumped so far past their entry trigger that they were no longer even viable. The market is often tricky when returning from a three-day weekend, but Tuesday's was even more so for many day traders. The best play of the morning did not come from traditional technical strategies like flags or breakouts, but rather from the gap itself.
For those of you that have been reading my column for years, you know that one of my favorite strategies in the indices comes from days where the market gaps like it did on Tuesday. Extreme gaps in the overall market have a strong tendency to pull into the gap's void throughout the morning with the exception being when the gap triggers a larger daily setup. In that case it can be a narrower session.
Dow Jones Industrial Average
Since Tuesday's gap followed several days of upside already, albeit slow ones, it served as a continuation of an existing trend, which is a great gap to fade. The setup triggered when the five minute low was broken. This tends to happen within the first 30 minutes of the day, such as it did on Tuesday. It set the pace for the morning with strong selling into 11:00 a.m. ET and slower selling into the early afternoon. The shift in momentum mid-day helped the market react well to 15 minute 20 period moving average support (Figures 1 and 2) and the market was able to reclaim its morning losses by the end of the day.
Despite Tuesday's gains, the market still ended May with a loss. The Dow Jones Ind. Average ($DJI) fell 1.9%, while the S&P 500 ($SPX) lost 1.35%, and the Nasdaq ($COMPX) slid 1.33%. Defensive stocks were amongst the strongest performers for the month, while global industrial firms such as Caterpillar (CAT) suffered the largest losses.
Tuesday's economic data remained disappointing despite the market's gains as well. May's reading for consumer confidence fell to 60.8 from 66.0 to a fresh six-month low, while prices for U.S. single-family homes also dropped to new lows on the year. Meanwhile, the Chicago Purchasing Managers Index fell from 67.6 to 56.6 in May.
Although this week is a shortened one, it will continue to be a busy one on the data front.
Wednesday brings the ADP National Employment Index, April's construction spending, the Institute for Supply Management's manufacturing index, and May's auto sales.
Thursday will kick off with last week's initial jobless claims, followed by factory orders for April.
Then comes the doozy: Friday's jobs data. Nonfarm payrolls are expected to increase 175,000, which is not enough to really get this economy on the roll. The recent gains in jobs so far this year has struggled to keep up with the number of new workers entering the jobs market, let alone been enough to make a dent in the nation's staggering unemployment rate.
Also out on Friday is the Institute for Supply Management's nonmanufacturing index for May.
The Dow Jones Industrial Average ($DJI) ended the day with a gain of 128.21 points, or 1.03%, and closed at 12,569.79 on Tuesday. The Dow almost managed to finish with all of its index components in the black, but McDonalds (MCD) couldn't recover enough of its losses and finished lower by a mere 0.1%. The top performers in the index were Pfizer (PFE) (+2.48%), Cisco Systems (CSCO) (+2.07%), Alcoa (AA) (+2.00%), and United Technologies (UTX) (+1.67%).
The S&P 500 ($SPX) gain of 14.10 points, or 1.06%, and closed at 1,345.20. The top percentage performers in the index were General Dynamics (GD) (+4.15%), MEMC Electr. Materials (WFR) (+2.95%), KLA-Tencor (KLAC) (+3.56%), and Yahoo (YHOO) (+3.31%). The weakest performers were JC Penney (JCP) (-1.58%), Patterson Companies (PDCO) (-1.48%), Broadcom (BRCM) (-1.48%), and MetroPCS Communications (PCS) (-1.43%).
The Nasdaq Composite ($COMPX) ended the session higher by 38.44 points, or 1.37%, on Tuesday and it closed at 2,835.30. The strongest performers in the Nasdaq-100 were Activision Blizzard (ATVI) (+4.72%), KLA-Tencor (KLAC) (+3.56%), Yahoo (YHOO) (+3.31%) and Sandisk (SNDK) (+3.21%). The weakest were Research in Motion (RIMM) (-1.72%), Broadcom (BRCM) (-1.48%), and Netapp (NTAP) (-1.01%).
A momentum reversal off highs around midnight in the index futures shifted the course of the market once again heading into Wednesday morning. The sharp recovery rally on Tuesday afternoon was followed by a series of slightly higher highs which shifted the overall pace of the rally and trapped new bulls with each higher high. This often triggers a strong reversal pattern, which took place into the early-morning hours on Wednesday and leaves the market weak once again as we head into the new trading day. The overall price action suggests that the 30-minute time frame has a higher chance of seeing a trading range form at this point since the momentum of the selling is now comparable to the overall rally from Tuesday evening. Even a continuation of the selling will typically lead with a period of congestion on a 15-30 minute chart before it can establish another strong intraday trend.
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.