Good day! The market put in another fairly wide range day once again on Thursday following continued fallout overnight from the Fed commentary on Wednesday. The index futures had congested afterhours and into the early-morning hours on Thursday, creating a very typical trading range for a continuation breakdown. Nothing on the global scene touched it. Ahead of the open the bears began to make their move and the breakdown accelerated into the opening bell.
In yesterday's outlook portion of this column, we were looking for the market to continue its 60-minute trading range with the strong possibility of a further test of lows and even the potential for a slightly lower low before we see a larger daily correction. This placed favor in the hands of the daytraders. Although we didn't get the slightly lower low, at least not yet, both the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI) established firm retests of prior lows early in the morning.
Dow Jones Industrial Average
The pace of the morning selloff on Thursday shifted between 10:15 am ET and 10:45 am ET. The market went for another test of lows, but the momentum was slower with greater overlap from bar to bar on the 5 minute time frame. Both the S&P 500 and Dow hit very slightly lower lows, which created a type of bear trap called a 2B. The Nasdaq also formed a reversal pattern at this time with a double bottom on the 5 minute time frame. This triggered the first strong intraday setup of the day on the 5 minute charts heading into 11:00 am.
The recovery off morning lows was the strongest in the Nasdaq due to its greater weakness earlier this month that left it more extended. Three waves of upside on the 2 minute time frame exhausted the recovery on the smaller time frame heading into noon, but a slightly continuation pattern was followed with a second wave of buying on the 5 minute charts into 13:45 ET.
Since these two waves of upside action in the Dow and S&P 500 took place on slower momentum than the morning selloff, it made it likely that we'd see a stronger correction following the second high. This formed into 15:00 ET with another set of three small waves of downside on the 2 minute time frame. Support hit just prior to the 15:00 ET correction period at prior lows and the 15 minute 20 sma in the Nasdaq, creating favor for a reaction off the support to further recovery efforts. At the same time, news hit the wires, boosting this already bullish pattern to an extent that would have been unlikely to have occurred without it.
With just an hour left in the session, Reuters reported that Greece received approval of its newest five-year austerity plan from the European Union and the International Monetary Fund. So, while the market already favored a technical bounce into the final hour of trade, this piece of information turbo-charged the move and the Nasdaq quickly returned to Thursday's highs while the S&P 500 and Dow also reclaimed most of the session's losses.
The Dow Jones Industrial Average ($DJI) ended the day with a loss of 59.67 points, or 0.49%, and closed at 12,050.00 on Thursday. Nine of the Dow's thirty index components posted a gain. The top performers were Home Depot (HD) (+2.06%), Pfizer (PFE) (+1.82%), Intel (INTC) (+1.50%), and Cisco Systems (CSCO) (+0.72%). The weakest performers were Coca-Cola (KO) (-2.14%), Exxon Mobil (XOM) (-1.73%), Chevron Corp. (CVX) (-1.69%), and JP Morgan Chase (JPM) (-1.52%).
The S&P 500 ($SPX) loss of 3.64 points, or 0.28%, and closed at 1,283.50. The top percentage performer in the S&P 500 on Thursday was Western Digital Corp. (WDC) (+7.06%). It was followed by strong gains in Bristol Myers Squibb (BMY) (+5.73%), Bed Bath & Beyond (BBBY) (+5.31%), and Red Hat (RHT) (+3.55%). The weakest were Flowserve Corp. (FLS) (-3.04%), HCP Inc. (HCP) (-3.00%), AvalonBay Communities (AVB) (-2.95%), and Boston Properties (BXP) (-2.89%).
The Nasdaq Composite ($COMPX) ended the session higher by 17.56 points, or 0.66%, on Thursday and it closed at 2,686.75. Bed Bath & Beyond (BBBY) (+5.31%), Seagate Technology (STX) (+5.01%), Research In Motion (RIMM) (+4.82%, and Marvell Tech. (MRVL) (+4.10%) were the strongest performers in the Nasdaq-100. The weakest were Electronic Arts (ERTS) (-2.84%), Flextronics (FLEX) (-1.40%), Google Inc. (GOOG) (-1.39%), and Dentsply Intl. (XRAY) (-1.36%).
The 200-day moving averages will continue to serve as support in the indices and the market is continuing to favor a more choppy reaction to the daily support. The Nasdaq-100 has the strongest chance for a more rapid recovery without needing to round off more at lows, but this is due to the larger downside extension throughout the first half of the month. Instead, it has a better chance of just hugging the 20-day moving average resistance to build up a range before pushing higher.
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.