FRIDAY'S MARKET WRAP-UP
After a strong start to the week and with the 50-day and 100-day moving averages looming overhead, I went into Wednesday's close with the impress that, while some more upside was still quite possible, the pace of the buying would slow and we'd start to see some profit-taking ahead of Friday's closing bell. So much for that theory! While this is typically the case after a strong three-day run like the indices experienced from Monday through Wednesday, promising global news and strong economic reports stateside have kept even hints of a bearish takeover at bay.
The past two months have been plagued by soft data and continued fears that a true economic recovery is still far on the horizon. Ongoing news from the housing front and employment data has done little to ease these fears. Nevertheless, as the indices tested 200-day moving average zones and the second round of quantitative easing wound down, glimmers of hope began to appear.
I was certainly not in the "jump on the bandwagon" crowd with last week's rally kicked off. I picked up shares in companies that did have slower downside action and the more rounded lows I spoke about throughout the first half of June, but I was prepared to be "unsurprised" should the market make a stronger test of the daily support prior to the end of the month. The market, however, had other plans and never even developed a larger intraday strategy for such a retest of lows to unfold.
When watching the lows develop, the Nasdaq ($COMPX) stood out. Instead of pulling back into the final week of June like the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI), it hugged its 20-day moving average. This gave it a stronger chance, as I expressed at the time, of being the one to manage the best breakout on the upside should it occur. And, in fact, it outstripped the weekly gains this past week in the both the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI), rallying 6.2% compared to the "mere" 5.6% and 5.4% gains in the other two, respectively.
Dow Jones Industrial Average (Figure 1)
Holy ISM Batman!
The market was showing continued strength on Friday even before the opening bell rang. Once again the index futures were basing along the highs of the week with no sign of slowing. The lower trend channel served as support (as shown in Figure 3 of the NQ). While it was not surprising to see higher highs develop on Friday, what was a surprise was how quickly those highs were made and how strong the move was. Instead of seeing the pace of the buying slow ahead of the weekend, the indices experienced another surge that took them once again to the upper end of the weekly trading channel.
Next page: More on what caused Friday's rally
Friday's rally was triggered not only by the trend channel support, but more specifically the 10:00 a.m. ET manufacturing index released by the Institute for Supply Management. Economists had been anticipating the index to pull back from 53.5% in May to 52.3% in June. Instead, it unexpectedly rose to 55.3%. Readings over 50% indicate expansion and weak data in May (primarily attributed to the natural disasters which hit Japan) left many skeptical of the possibility of such a recovery. One component of the report, the employment index, offered particular comfort. The employment index rose from 58.2% in May to 59.9%. The main government report on employment for June is due out at the end of the week.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) ended the day on Friday with a gain of 168.43 points, or 1.36%, and closed at 12,582.77. All thirty of the Dow's index components ended Friday in the black. The top performers were Alcoa (AA) (+2.84%), JP Morgan Chase (JPM) (+2.19%), Caterpillar (CAT) (+2.03%), 3M (MMM) (+1.92%), and United Technologies (UTX) (+1.83%). The Dow ended the week with a gain of 5.4%. This was its strongest weekly gain since November 2008.
The S&P 500 ($SPX) gain of 19.03 points, or 1.44%, and closed at 1,339.67. The strongest percentage performers in the index were Motorola Mobility (MMI) (+6.53%), Apollo Group (APOL) (+6.36%), Darden Restaurants (DRI) (+6.09%), and Constellation Brands (STZ) (+4.76%). The rally in Darden Restaurants (DRI) followed its Thursday evening projection that 2011 earnings would beat Wall Street expectations. The weakest performers in the index were Hospira Inc. (HSP) (-1.75%), CF Inds. Holdings (CF) (-1.52%), and EOG Res. (EOG) (-1.41%). Only seventeen of the S&P 500's index components posted a loss. The S&P 500 finished the week higher by 5.6%.
Nasdaq Composite (Figure 3)
Marathon Oil (MRO) will show up on some systems as having had a severe loss on Friday, but in fact, the parent company spun off Marathon Petroleum Corp., which is the second-largest independent U.S. oil refiner. After prices were adjusted for the spinoff, MRO shares were up 3% and briefly hit a three-year high. Although MRO's spinoff had a strong showing on Friday, another spinoff, this time off Cablevision (CVC) had a more difficult welcome. Media company CVC spun off AMC Networks, which has risen in popularity thanks to hit shows "Mad Men" and "Breaking Bad". Shares of AMC fell 8.4%. CVC, on the other hand, ended the session higher by 2.5%.
The Nasdaq Composite ($COMPX) ended the session higher by 42.51 points, or 1.53%, on Friday and it closed at 2,816.03. The strongest performers in the Nasdaq-100 were Apollo Group (APOL) (+6.36%), Micron Tech. (MU) (+4.68%), Wynn Resorts (WYNN) (+4.20%), and SanDisk (SNDK) (+3.13%). Only four of the 100 index components ended the session with a loss. They were Vertex Pharmaceuticals (VRTX) (-0.56%), Check Point Software (CHKP) (-0.18%), Amgen Inc. (AMGN) (-0.12%), and Express Scripts (ESRX) (-0.04%).
Next page: Tuesday's outlook
My outlook for Tuesday is actually the same as it had been heading into the end of last week. We didn't see the slowdown take place to trigger stronger back and forth swings intraday on the 5 minute time frames thanks to the larger 15 minute range breakouts and news, but the market is now at stronger resistance and even more extended than before, hence making it more vulnerable as well.
On another note, we're also kicking off a new month, and even a new quarter. The first trading day of each of the past two months marked dramatic turning points in the market. May kicked off with a reversal off the year's highs, while June kicked off the sharpest portion of the correction off highs than began in May. Even the start of April fell in line with a short-term period of resistance in the indices that took several weeks to clear. In fact, March was the only month that began this year without having any major impact on the daily direction of price action.
This does not lead to the conclusion, however, that Tuesday's kickoff to July will lead to a strong reversal or selloff. It is more likely that it ends up being the trigger for a shift in the pace of the rally to finally break. This will take the focus off the stronger trend moves that hold from one day into the next and place it once again on the shorter intraday time frames with the wider price swings on the 5-15 minute time frames.
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.