WEDNESDAY'S MARKET WRAP-UP
Market Snapshot for July 6, 2012 (9:05 pm ET):
- Closing Prices: DOW 12,626.02 (+56.15, +0.45%), S&P 500 1,339.22 (+1.34, +0.1%), NASDAQ 2,834.02 (+8.25, +0.29%), Nikkei 225 10,074.94 (-7.54, -0.07%), DAX 7,431.19 (-8.25, -0.11%), FTSE 6,002.92 (-21.11, -0.35%)
- OIL 97.18, GOLD 1,526.00, SILVER 35.911
- EURO 1.4321, YEN 80.93, BRITISH POUND 1.6001, U.S. DOLLAR INDEX 75.355
Exhaustion Shows Its Face After a Week of Strong Buying
Following last week's stellar upside move that ranked the week as the strongest in approximately two years, things have finally started to slow as this shortened trading week wears on, giving the indices a chance to catch their breath. Volume has dropped off, which is typical following such a run, and the indices are currently dealing with a strong price resistance zone at prior daily highs from the start of June.
The Impact of Momentum
As I discussed last week, it's quite uncommon to see a move like the one we just experienced have a strong and lasting reversal. Instead, the pace of the buying tends to shift, creating a slowdown in the upside momentum as opposed to a dead stop. Even when a sharp pivot off highs does appear to begin, the correction itself will have a difficult time sustaining the strong reversal pace and a much more gradual start to a pullback will begin. The selloff in June was a good example of slowing pace. The downside began quickly, but the pace of the downtrend channel shifted as the indices neared support. Similar action occurred heading into both April and May on the daily charts, albeit at highs.
Dow Jones Industrial Average (Figure 1)
ISM Non-Manufacturing Data Disappoints
When combined with the trend exhaustion and overhead resistance, along with the correctional bias due to the start of a new trading month and new quarter, the light data so far this week has been unable to strongly sway the intraday action. At 10:00 a.m. ET the ISM non-manufacturing index for June was released. The index fell from 54.6 in May to 53.3, which was less than the 54.0 analysts had been anticipating. The market pulled lower immediately following the data, creating a continuation of 15:30 ET pivot off Tuesday's intraday highs.
The selloff was short-lived, however, and support at the lower end of the 30-minute trading channel held, along with the 10:15 a.m. ET correction period. A three-wave rally followed, which led the indices higher into the early afternoon. The smoothest trend was in the stronger-performing Nasdaq, which managed to end the session with its seventh straight day of gains on Wednesday. Both the S&P 500 ($SPX) and Dow Jones Ind. Ave. ($DJI) were helpful in timing the mid-day reversal, however, due to the slowdown in the pace of the buying on their final 5-minute run into 13:00 ET highs. This was also another major intraday correction period where strong reversals are common.
The remainder of Wednesday's session was rather slow. Two waves of selling into 14:30 ET were followed by a choppy PhoenixTM into the closing bell, but the price action was on the sloppy side although the overall pattern between 13:00 ET and the closing bell was that of a Reverse Head & Shoulders on the 5 minute time frame. The follow-through on this buy strategy took place afterhours, coming out of the 5 minute PhoenixTM (which also corresponded to the creation of the right shoulder in the Head & Shoulders setup).
S&P 500 (Figure 2)
Next page: Index results
The Dow Jones Industrial Average ($DJI) ended the day on Wednesday with a loss of 12.90 points, or 0.1%, and closed at 12,569.87. Two-thirds of the Dow's thirty index components posted a gain. The top performers were Caterpillar (CAT) (+1.52%), Intel (INTC) (+1.38%), DuPont (DD) (+1.38%), and IBM (IBM) (+1.30%). The weakest were Bank of America (BAC) (-2.36%), JP Morgan Chase (JPM) (-1.15%), and Disney (DIS) (-1.00%).
The banking shares had not participated in last week's rally to the same degree as the overall market, leaving them even more vulnerable to weakness this week. Wednesday's hit came following a rise in interest rates in China and the move by Moody's to cut Portugal's credit rating to junk status.
The S&P 500 ($SPX) loss of 1.79 points, or 0.13%, and closed at 1,337.88. The strongest percentage performers in the index on Wednesday were Urban Outfitters (URBN) (+5.63%), Compuware Corp. (CPWR) (+5.52%), Tesoro Corp. (TSO) (+4.10%), and Cablevision Sys. Corp. (CVC) (+3.75%). The strongest sectors were consumer staples (+0.6%), industrials (+0.5%), and technology (+0.5%). The weakest individual performers were Charles Schwab (SCHW) (-3.95%), Marathon Oil Corp. (MRO) (-3.70%), Allegheny Tech. (ATI) (-3.68%), and News Corp., (NWSA) (-3.64%). The weakest sectors were telecoms (-0.8%), financials (-0.6%), and consumer discretionary (-0.3%).
Nasdaq Composite (Figure 3)
The Nasdaq Composite ($COMPX) ended the session higher by 9.74 points, or 0.35%, on Wednesday and it closed at 2,825.77. The strongest performers in the Nasdaq-100 ($NDX) were Urban Outfitters (URBN) (+5.63%), First Solar (FSLR) (+2.04%), Costco Wholesale (COST) (+1.66%), and Gilead Sciences (GILD) (+1.64%). The weakest were Research In Motion (RIMM) (-4.15%), Vertex Pharmaceuticals (VRTX) (-3.87%), News Corp. (NWSA) (-3.64%), and LAM Research (LRCX) (-2.92%).
My trading outlook for the remainder of the week has not changed much over the past several days. I am continuing to expect slower price action from one day to the next with better intraday swings on the 5 minute time frame that will favor daytraders. Swingtraders will be more likely to have to deal with a lot more overlap in price from one day to the next, which can make timing on stop adjustment and target levels a bit more difficult.
Employment Data Takes the Spotlight
Although this week has been light on data so far, the focus will increase over the next two days. The latest weekly claims for unemployment will be posted early Thursday morning, while the highly anticipated employment numbers for June will be released prior to Friday's opening bell. Friday's reports included June's nonfarm payroll, the latest unemployment rate, the average workweek, and average hourly earnings. Nonfarm payrolls are expected to have increased by 100,000 in June. This is not enough to keep up with new workers entering the workforce and is just half of what we had seen as monthly gains earlier this year (which were still not enough to make a dent in the larger unemployment picture).
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.