TUESDAY'S MARKET WRAP-UP
Market Snapshot for October 25, 2011 (5:15 p.m. ET):
Closing Prices: DOW 11,706.62 (-207.00, -1.74%), S&P 500 1,229.05 (-25.14, -2.00%), NASDAQ 2,638.42 (-61.02, -2.26%), Nikkei 225 8,762.31 (-81.67, -0.92), DAX 6,046.75 (-8.52, -0.14%), FTSE 5,525.54 (-22.52, -0.41%)
OIL 92.44, GOLD 1,706.30, SILVER 33.21
EURO 1.3906, YEN 76.04, BRITISH POUND 1.6001, U.S. DOLLAR INDEX 76.45
Swift Reaction Follows Daily Resistance
The indices struck strong daily resistance ahead of Tuesday's session (200-day moving averages in the S&P 500 and Dow Jones Ind. Average), making it difficult for the indices to push higher yesterday. As we headed into the day's session, the index futures were also experiencing trend exhaustion. Both the S&P ($SPX) and Dow ($DJI) had three highs after a strong initial run into Friday's open. Next they established longer periods of gradual correction, followed by a fourth high. This was repeated with another slightly higher high in the Dow ahead of Tuesday's open. As discussed in yesterday's column, this type of trend combination will typically lead to a break in the uptrend channel, whereby the market is unable to further sustain higher highs and higher lows and a larger correction typically occurs.
Dow Jones Industrial Average (Figure 1)
On Tuesday the selling began early. The slightly higher highs in all three indices that took place into 7:00 a.m. ET triggered a bull trap I call a 2T ("2 tops") on the 15-minute time frame. Since the pace slowed into the second high on both the Dow and Nasdaq compared to earlier buying, it created an excellent shorting opportunity on the 15 minute time frame. The pace of the reversal off premarket highs increased into Tuesday's opening bell following news that EU finance ministers would not be meeting ahead of Wednesday's summit as anticipated. A two-wave continuation pattern in the form of a triangle continued the selloff into the closing bell.
Tuesday's Economic Reports
The morning's economic data releases had very little impact upon the session's price action on Tuesday. The S&P/Case-Shiller 20-City Housing Price Index fell 3.8% in August, which was in line with expectations. In July it had fallen 4.1%. Later, the Consumer Confidence Index came in lower at 39.8, which was its worst reading in over two years and less than the anticipated reading of 46.0.
S&P 500 (Figure 2)
The Dow Jones Industrial Average ($DJI) ended the day on Tuesday with a loss of 207.00 points, or 1.74%, and closed at 11,706.62. Out of the Dow's thirty index components, only Cisco Systems (CSCO) (+0.46%) and Intel (INTC (+0.16%) posted a gain. The top decliners were 3M (MMM) (-6.25%), Alcoa (AA) (-4.16%), Bank of America (BAC) (-3.87%), and Hewlett-Packard (HPQ) (-3.73%). 3M missed earnings estimates and weighed heavily on the Dow.
The S&P 500 ($SPX) finished the session with a loss of 25.14 points, or 2.00%, and closed at 1,229.05. None of the index's industry groups managed to end the session with a gain. Top percentage performers in the index were Quest Diagnostics Inc. (DGX) (+10.83%), Sherwin Williams Co. (SHW) (+1.92%), and Masco Corp. (MAS) (+1.71%). The weakest industry groups were the financials (-3.1%) and materials (-2.5%). The weakest percentage performer was Netflix (NFLX) with a loss of 34.90% after announcing on Monday that it lost 800,000 subscribers in the U.S. during its last quarter. It was followed by another strong decliner: First Solar (FSLR), which fell 25.33% (most of it in the afternoon) after it announced that its CEO, Rob Gillette, is leaving the company. AK Steel Holding Corp. (AKS) (-13.64%) and SLM Corp. (SLM) were the other double digit percentage losers.
The Nasdaq Composite ($COMPX) ended the session lower by 61.02 points, or 2.26%, on Tuesday and it closed at 2,638.42. The strongest performer in the Nasdaq-100 ($NDX) was Illumina Inc. (ILMN) (+7.24%). Only eight posted a gain. ILMN was followed by Warner Chilcott Plc. (+0.98%) and Liberty Interactive Corporation (LINTA) (+0.64%). The weakest percentage performers were Netflix (NFLX) (-34.90%), First Solar (FSLR) (-25.33%) and Green Mountain Coffee (GMCR) (-12.18%).
Nasdaq Composite (Figure 3)
On Wednesday the focus shifts back to the European Union. Although the U.S. data includes September's durable goods orders and new home sales, in addition to another round of earnings, European leaders are expected to unveil a plan to deal with its own debt crisis. The index futures have been trading nearly flat overnight in anticipation of the announcement. From a technical standpoint the futures are creating a 15 minute Phoenix pattern heading into the last hour of trade before the opening bell. This is a bullish pattern and since the pace of the buying overnight was slower, this pattern often has stronger-than-average upside follow-through. Any disappointment out of Europe, however, could easily squash the move.
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.