Market Snapshot for September 22, 2011 (12:32 am ET):
- Closing Prices: DOW 11,124.84 (-283.82, -2.49%),S&P 500 1,166.76 (-35.33, -2.94%), NASDAQ 2,538.19 (-52.05, -2.01%), Nikkei 225 8,558.44 (-182.72, -2.09), DAX 5,433.80 (-137.88, -2.47%), FTSE 5,288.41 (-75.30, -1.40%)
- OIL 84.41, GOLD 1,780.90, SILVER 39.585
- EURO 1.3542, YEN 76.77, BRITISH POUND 1.5459, U.S. DOLLAR INDEX 78.615
Fed Fails to Provide Relief
The focus throughout Wednesday's session was the Fed's policy announcement following a two-day meeting of the FOMC. The market held up well heading into the news, but offered little action for short-term traders by holding in a trading range throughout the session until after the afternoon announcement. As I mentioned in yesterday's column, this set the stage for the bears with favor towards a late-day breakdown. This bias played off daily resistance levels such as the 50-day moving averages in the Dow Jones Industrial Average ($DJI) and S&P 500 ($SPX).
I've spent a lot of time over the years writing about what to expect following a Fed announcement and Wednesday afternoon was a strong example of the norm. Volatility spikes immediately following the news. This is the most dangerous time for market participants since stops are easily flushed. Heading into the news, my bias was in favor of the bears, but notice that the indices flushed quickly to the upside before continuing with that bias. This would have easily shaken out traders that positioned themselves short ahead of the release and used stops on the books to protect themselves from extreme losses.
Dow Jones Industrial Average (Figure 1)
With news events this strategy for entry and stop placement, which is great under normal market circumstances, is extremely hazardous. Once the news had settled, however, there was still plenty of opportunity to play with. The action I typically look for following Fed releases takes place within three waves. These tend to occur first on a 1 minute chart and then repeat on the 5 minute. The 5 minute is where most traders find the best opportunity since the action is not nearly as hectic as the immediate response.
On Wednesday, the initial reaction on the 5 minute time frame was in favor of the bears. A two-wave secondary reaction followed, which set up a nearly textbook short off the 5 minute 20 period moving averages in the major indices heading into the final 45 minutes of trade. This was the strongest Fed reaction we've seen in quite some time and one of the strongest of the past two years.
Lately the Fed announcement has not been as exciting as it once was, but this time around the Fed gave investors more food for thought with the additional announcement it would move to launch yet another recovery package. Dubbed "Operation Twist", this move to rebalance the Fed's portfolio consists of a $400 billion program that would focus upon selling short-term notes to purchase longer-term Treasuries. The Fed also reiterated plans to keep interest rates low into at least 2013, and emphasized the "downside risks to the economic outlook", in addition to "strains in the global financial markets."
The market should take some time on Thursday to digest the selloffs of the past two days, but use caution when approaching larger intraday and overnight positions. A slow down in the selloff afterhours from Wednesday evening into early Thursday morning leaves the door open for some upside recovery into Thursday's session, but the larger 15 minute time frames should limit such action and the overall pace will be slower than the decline. As I write this, however, there is no setup for a buy and the potential for the slower trend to continue into previous daily lows in the Dow and S&P 500.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) ended the day on Wednesday with a loss of 283.84 points, or 2.49%, and closed at 11,124.84. Hewlett Packard (HPQ) was the only component in the Dow to post a gain. It rallied 6.72% on speculation that the company's CEO, Leo Apotheker, may be removed after only 11 months on the job. The top decliners in the index were Bank of America (BAC) (-7.54%), JP Morgan Chase (JPM) (-5.92%), Caterpillar (CAT) (-5.14%), and Travelers (TRV) (-4.42%). The financials were the hardest hit following debt rating downgrades by Moodys on Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC).
The S&P 500 ($SPX) loss of 35.33 points, or 2.94%, and closed at 1,166.76. The top percentage performers in the index were Hewlett Packard (HPQ) (+6.72%), Range Res. Corp. (RRC) (+4.73%), Oracle (ORCL) (+4.20%), and General Mills (GIS) (+2.53%). None of the S&P's industry groups managed a gain. The top individual decliners were Alpha Natural Resources (ANR) (-17.16%), Cliffs Natural Resources (CLF) (-12.82%), Morgan Stanley (MS) (-8.60%), and Leucadia Natl. Corp. (LUK) (-8.52%).
The Nasdaq Composite ($COMPX) ended the session lower by 52.05 points, or 2.01%, on Wednesday and it closed at 2,538.19. The strongest performers in the Nasdaq-100 ($NDX) were Liberty Media Corp. (LINTA) (+8.12%), Oracle (ORCL) (+4.20%), Vertex Pharmaceuticals (VRTX) (+2.17%), and Netapp Inc. (NTAP) (+1.79%). The weakest performers were Illumina Inc. (ILMN) (-7.36%), First Solar (FSLR) (-7.18%), Joy Global (JOYG) (-7.16%), and Virgin Media (VMED) (-5.70%).
Nasdaq Composite (Figure 3)
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.