Market Snapshot for October 13, 2011 (1:40 a.m. ET):
- Closing Prices: DOW 11,518.85 (+102.55, +0.9%), S&P 500 1,207.25 (+11;71, +0.98%), NASDAQ 2,604.73 (+21.70, +0.84%), Nikkei 225 8,819.92 (+81.02, +0.93), DAX 5,994.47 (+129.47, +2.21%), FTSE 5,441.80 (+46.10, +0.85%)
- OIL 85.88, GOLD 1,678.60, SILVER 32.2415
- EURO 1.3784, YEN 77.08, BRITISH POUND 1.5733, U.S. DOLLAR INDEX 77.215
Gains Erode Following Fed Minutes
As Tuesday's session wound to a close the market was favoring short-term weakness, which played out afterhours, but my expectations heading into Wednesday were that we could easily see the market shift directions once again. Talk of further bailout plans in Europe, namely Slovakia and Greece, and EU plans aimed at further strengthening banks helped trigger an early-morning rally in the index futures that kicked off around 4:00 a.m. ET. Although the momentum slowed on a continuation move intraday, the rally continued throughout most of Wednesday's session.
Wednesday was a decent day for daytraders. Early congestion on the five minute time frame broke sharply higher out of 10:00 a.m. ET and the rally continued mid-day before the indices struck price resistance at prior daily highs at approximately the same time as the 13:00 ET correction period hit. This early afternoon continuation, however, was weaker than earlier price action, casting doubts upon the market's ability to hold onto the day's gains in late afternoon trade. The Nasdaq, which had weakened considerably in momentum compared to its premarket rally, was particularly vulnerable.
Dow Jones Industrial Average (Figure 1)
At 14:00 ET the minutes from September's Federal Open Market Committee's meeting were released. At that time, the Fed had stated that it saw "considerable uncertainty" for a "pickup in economic growth". The market had not taken the news well and had sold off sharply at the time. The debate on how the Fed can help support further economic recovery efforts has been an ongoing one dating back nearly to when Bernanke took over the reins of Fed Chairman from Greenspan.
There was not an immediately strong price reaction following the release, but the Dow Jones Ind. Average ($DJI) and S&P 500 ($SPX) both pushed to slightly higher highs on the day. This two-wave move from 14:00 to 14:45 ET created a bull trap. Meanwhile, the Nasdaq hugged its 5 minute 20 sma for a two-wave Avalanche short setup. This bearish strategy triggered around 14:45 ET and was followed by another two-wave move in the form of a bear flag off the 5 minute 20 sma resistance that took the market lower once again into the close and afterhours trade. Volume had dropped off mid-day on Wednesday ahead of the minutes, but picked up in the final two hours of trade and particularly as the closing bell approached.
S&P 500 (Figure 2)
Index Wrap Up
The Dow Jones Industrial Average ($DJI) ended the day on Wednesday with a gain of 102.55 points, or 0.9%, and closed at 11,518.85. Twenty-five of the Dow's thirty index components posted a gain. The top performers were Disney (DIS) (+3.53%), Bank of America (BAC) (+3.30%), JP Morgan (JPM) (+2.79%), and American Express (AXP) (+2.78%). The worst performers were Alcoa (AA) (-2.43%) and McDonalds (MCD) (-1.10%). Alcoa underperformed after posting lower-than-anticipated quarterly earnings.
The S&P 500 ($SPX) finished the session with a gain of 11.71 points, or 0.98%, and closed at 1,207.25. The top percentage performers in the index were CBRE Group (CBG) (+8.75%), Sprint Nextel Corp. (S) (+7.98%), MEMC Electr. Materials (WFR) (+6.41%), and Lincoln Natl. Corp. (LNC) (+6.24%). The weakest were Tellabs (TLAB) (-5.32%), Western Digital (WDC) (-4.61%), and Baxter Intl. (BAX) (-3.05%).
The Nasdaq Composite ($COMPX) ended the session higher by 21.70 points, or 0.84%, on Wednesday and it closed at 2,604.73. The strongest performers in the Nasdaq-100 ($NDX) were Infosys Ltd. (INFY) (+6.99%), Cognizant Tech. Solutions (CTSH) (+5.60%), and NII Holdings (NIHD) (+5.00%). The weakest were Alexion Pharmaceuticals (ALXN) (-4.16%), Green Mountain Coffee (GMCR) (-3.97%), and Research In Motion (RIMM) (-2.17%).
Nasdaq Composite (Figure 3)
Earnings Season Kicks Off
Alcoa's earnings marked the unofficial start of third quarter earnings season. JP Morgan (JPM) will be one to watch on Thursday morning, while Google (GOOG) reports after the close on Thursday afternoon. Over the course of this earnings season, companies in the S&P 500 are expected to have risen between 12-13% for Q3 2011 with revenue up 10% (according to Thomson Reuters).
Outlook
Heading into Thursday, the market has continued to hold the 60-minute 20 sma support we were looking at yesterday and has offered a third wave of buying in the S&P 500 and Dow since hitting lows on the 4th. There is still room to move before striking the 100-day moving average resistance, but the market is due for a correction.
The market can correct in several ways: It can slow the pace of a trend move, essentially creating a rounded high; it can reverse, which will tend to look like an inverted "V"; or, it can fall into a trading range and correct through time.
In the first option, we would expect to see the pace of the buying slow into the weekend. This would draw the market to that 100-day moving average resistance level and can yield a more rapid initial reaction to that resistance zone. In the second scenario we would not see as much of a shift in momentum and an Avalanche on the 60-minute time frame would be likely. In the third scenario, we would also not see much of a momentum shift in the upside rally before a trading range began. Currently, the first scenario looks most promising, but in any case there is a higher degree of risk for any new swingtrades as long positions at this time.
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.
