Stock indexes flirt with daily support zone

MONDAY'S MARKET WRAP-UP

Debt Ceiling Deal Leaves Market Unsatisfied

Good day traders! The euphoria that brought about a strong open in the indices on Monday was short-lived. Although Obama announced on Sunday that an agreement had been reached regarding the highly debated debt ceiling, the obvious fact that this did little to solve ongoing budget concerns remained. The futures were already beginning to give back Sunday evening's gains before the regular weekday trade began. That move, however, escalated with the release of the latest manufacturing data.

Dow Jones Industrial Average (Figure 1)

ISM Manufacturing Data Disappoints

According to the Institute for Supply Management, manufacturing activity in July fell despite the expectation of little change. The ISM's index went from 55.3 in June to 50.9 in July. Readings over 50 indicate expansion, which means that very little growth was seen in July. The market had already began to sell off out of the opening bell on Monday and the indices were striking five minute 20 simple moving average support at the time of the data release. The news shoved the market through this support level for its strongest intraday move of the session with the indices taking back the remaining premarket gains in a matter of seconds and quickly returning the market to Friday's lows.

Friday's lows did serve as price support in the indices, but the escalating pace of the selloff meant that recovery efforts would be extremely limited to begin with. Instead, a common two-wave continuation pattern developed on the 2-5 minute charts that brought the indices to the lower end of the 60 minute trend channel by noon. Continuation moves such as this one following unexpected news are quite common. It allowed the momentum to slow into mid-day and the market held the 60 minute and daily support throughout the remainder of the session. On the daily charts all three of the major indices had landed a more solid test of moving average support with the 200-day sma hitting in the Dow ($DJI) and S&P 500 ($SPX) and the 50-day moving average holding in the Nasdaq ($COMPX).

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