Market Snapshot for October 4, 2011:
- Closing Prices: DOW 10,808.71 (+153.41, +1.44%), S&P 500 1,123.95 (+24.72, +2.25%), NASDAQ 2,404.82 (+68.99, +2.95%), Nikkei 225 8,450.74 (-5.38, -0.06), DAX 5,216.71 (-159.99, -2.98%), FTSE 4,944.44 (-131.06, -2.58%)
- OIL 77.74, GOLD 1,635.00, SILVER 30.165
- EURO 1.3274, YEN 76.69, BRITISH POUND 1.5424, U.S. DOLLAR INDEX 79.72
Market Breaks to New 52-Week Lows
Market volatility has been quite high ever since the market broke down into the beginning of August. Tuesday's session was no exception. After multiple days of of successive downside, the market was becoming quite extended and starting to favor an upside break in the trend channel on the 60 minute charts heading into mid-week. As I mentioned in yesterday's column, however, the pace of the selloff was strong enough that it invited another flush to new lows before such as correction.
The morning breakdown in the market took place in the early hours of the day in the index futures when trade began in London at 3:00 a.m. ET. This is a common time for major moves in the futures to take place and the index futures had been trading in a gradual trading range following Monday's close. A second high within that channel took place on weak upside momentum heading into 3:00 a.m. ET. This created a technical pattern for a break lower as well.
Dow Jones Industrial Average (Figure 1)
If the morning flush had been rapid, we would have seen a gradual move off those lows as compared to Monday's decline, but the pace of the selling shifted a great deal compared to Monday's action despite breaking to new lows on the year in both the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI).
The market was down more than 2% by the time the 10:00 a.m. ET economic data was released. By this point the market had fallen more than 20% since peaking in May. This is a key price level because trade under that price point is viewed as bear territory.
The 10:00 a.m. ET data was not terribly reassuring. According to the U.S. Commerce Department, new orders for U.S. manufactured goods were down 0.2%, falling short of expectations that they would remain unchanged. July's 2.4% increase was also revised lower to 2.1%. Although disappointing, market participants were happy to see that the numbers did not miss by a larger amount and it was not enough to push an already exhausted market even lower. Instead, the market took this as its cue to finally offer a reprieve.
Tech stocks, and particularly semiconductors, were amongst the strongest players Tuesday morning. By mid-day the Nasdaq was in positive territory, but sharp selling pressure hit in Apple (AAPL) in the early afternoon following the unveiling of its latest iPhone. Apple had also struck technical resistance at noon at its 5 minute 200 period moving average. The 5 minute sell trigger came at approximately 12:50 ET.
S&P 500 (Figure 2)
Technicals or News?
Despite strong afternoon selling in Apple (AAPL), the afternoon downside in the broad market was more gradual than the selloff into 10:00 a.m. ET and substantially slower than Monday's decline. This continued shift in momentum with each wave of downside slower than the last is a process that often results in a strong reversal... at least in the short term. Lighter volume on the selloff compared to earlier trade also showed a lack of conviction for further downside intraday. The channel break that triggered the upside reversal on Tuesday took place out of the 15:00 ET correction period.
In addition to strong technical reasons behind an afternoon rally, news headlines also may have played a role, notably in the financials, which led a powerful late-day recovery that swung the market higher by approximately 4% off morning lows.
The Financial Times reported that European Ministers were looking into further ways to reinforce European banks. This really should come as no surprise, but when rapid moves take place in the market intraday it's typical for news services to look for reasons to support it that go beyond the purely technical aspects and once the financials grabbed hold of this news they ran with it.
U.S. Federal Reserve's chairman Ben Bernanke's appearance before the Congressional Joint Economic Committee on Tuesday to discuss the economy and recent monetary policy was practically overlooked. His remarks supported further economic stimulus, but contained nothing unexpected.
The European Central Bank will hold its rates meeting on Thursday. Recent speculation suggested that the bank could cut rates once again, but sentiment has once again shifted in favor of them holding steady.
Nasdaq Composite (Figure 3)
Index Wrap Up
The Dow Jones Industrial Average ($DJI) ended the day on Tuesday with a loss of 258.08 points, or 2.36%, and closed at 10,655.30. Twenty-six of the Dow's thirty index components posted a gain. The top performers were JP Morgan Chase (JPM) (+6.55%), DuPont (DD) (+4.52%), Bank of America (BAC) (+4.16%). The top decliners included Merck (MRK) (-0.70%) and Kraft Foods (KFT) (-0.67%).
The S&P 500 ($SPX) finished the session with a loss of 32.19 points, or 2.85%, and closed at 1,099.23 with a minor breech of the 1,100 price point. The top percentage performers in the index were Morgan Stanley (MS) (+12.35%), Sears Holdings (SHLD) (+11.69%), Cliffs Natural Resources (CLF) (+10.58%), and Akamai Technologies (AKAM) (+10.24%). The weakest were Newmont Mining (NEM) (-3.15%), Allegheny Technologies (ATI) (-2.87%), and Northeast Utilities (NU) (-2.46%).
The Nasdaq Composite ($COMPX) ended the session lower by 79.57 points, or 3.29%, on Tuesday and it closed at 2,335.83. The strongest performers in the Nasdaq-100 Sears Holdings (SHLD) (+11.69%), Akamai Technologies (AKAM) (+10.24%), F5 Networks (FFIV) (+10.22%), and NVIDIA (NVDA) (+9.23%). Only nine posted a loss. The weakest performers were TEVA Pharmaceuticals (TEVA) (-1.62%), Liberty Interactive Corp. (LINTA) (-1.41%), and Cerner Corp. (CERN) (-0.87%).
Jobs growth will remain on center stage this week, beginning on Wednesday with September's ADP report. The most widely followed jobs reports, however, will take place on Friday when the government will release September's nonfarm payrolls data, along with the most recent unemployment rate, hourly earnings, and the average work week. The unemployment rate is expected to remain unchanged at 9.1% with very little net gain in the real employment data.
Earnings season kicks off next week with the release of Alcoa's quarterly earnings, but those to still watch for this week include Costo (COST), Marriott Intl. (MAR), and Monsanto (MON) on Wednesday; and Constellation Brands (STZ) on Thursday.
On the technical side, I am expecting the rally which took place intraday into Tuesday's closing bell will experience a momentum shift as the week progresses and that it will not be able to sustain such a pace. Over the course of the next week I do not expect it to outstrip the selloff of the past week, although I do believe that the extreme selling is behind us for now. Even if the rally cannot hold, we should see the momentum in the 60-minute downtrend channel become markedly more gradual. The market has a strong level of support hitting and volume was also strong when Tuesday afternoon's buying came in, but we don't have a decent continuation pattern for upside action forming as we head into midnight. Instead, we can easily see the afternoon gains further erode before once again finding support on the 15 minute time frame.
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.