TUESDAY'S MARKET WRAP-UP
Market Snapshot for January 10, 2011 (10:30 p.m. ET):
Closing Prices: DOW 12,462.47 (+69.78, +0.56%), S&P 500 1,292.08 (+11.38, +0.89%), NASDAQ 2,702.50 (+25.94, +0.09%), Nikkei 225 8,422.26 (+31.91, +0.38%), DAX 6,162.98 (+145.75, +2.42%), FTSE 5,696.70 (+84.44, +1.50%)
OIL 102.17, GOLD 1,631.80, SILVER 29.90
EURO 1.2773, YEN 76.84, BRITISH POUND 1.548, U.S. DOLLAR INDEX 81.175
Upside continues, but...
After a jump start to kick off the New Year, which resulted in a solid opening gap to the upside last Tuesday, the market spent the remainder of the week trying to figure out what to do next. The week's congestion had a bias in favor of a bullish resolution, but the question was whether that resolution would be merely a trap for the bulls, or a solid upside breakout. So far, that question still remains.
Dow Jones Industrial Average (Figure 1)
The gains made so far this week have been thanks to the rally that began afterhours on Monday and continued throughout the evening and into Tuesday's opening bell. The steady buying, which held 15 minute 20 simple moving average support throughout, began to see a shift in momentum after 6:00 a.m. ET. By 8:30 a.m. ET the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI) futures had both experienced a second, slightly higher high in premarket trade and were pulling back once again just prior to the bell. A third slightly higher high followed when the 10:00 a.m. ET wholesale inventories data came out. The resulting pattern was a Momentum Reversal Short (TM) in the S&P 500 futures. This led to a selloff that lasted into the early afternoon and resumed at the 15:00 ET correction period and into afterhours trade. As expected, intraday buy setups were few and far between in the overall market and were primarily limited to 2-5 minute charts.
The wholesales data that "popped" the market was an increase in sales by 1.6%, while inventories were up 0.1%. Although inventories were less than anticipated, the increase in sales was welcomed, although the jump in the market that followed was exactly what the market needed to create yet one more bull trap to complete the Momentum Reversal (TM) pattern that triggered shortly thereafter.
S&P 500 (Figure 2)
The weak action following the morning's data was not the only reason the bulls would have to be concerned that the 30-minute upside breakout is still without a solid foothold. As we saw on the premarket charts in the S&P 500, a series of slightly higher highs following a stronger rally can lead to rapid corrections that can wipe out a large portion of those gains in a fraction of the time it took to establish them.
The daily charts of the indices are forming this same pattern with momentum shifting. The strongest upside began on December 20th, but the first high on that rally was made on the 28th. This was followed by a second slightly higher high last Tuesday. Now the formation of a third is under way.
The weekly charts still have some room to move before striking resistance more solidly on the upside, even though the daily charts suggest hesitation. The 10-day moving average is serving as the support for the current move on the daily time frame. In order to avoid a stronger daily pullback, we want to see that support level hold. Unless the upper channel from the past several weeks breaks to the upside over the next several days, however, I will be using a great deal of extra caution on long positions, particularly in the indices, and will be focusing on smaller time frames for setups in that direction.
A break in the upper channel Wednesday, however, can kick of another wave of buying comparable to the December 20-28th move. This is not something that is typically likely given the daily price action, but has increased potential due to the wiggle room still available on the weekly charts, which could treat this as a weekly breakout from the October to December congestion and would treat the December 28th and January 3rd highs as part of a two-wave continuation move on the upside. Whether we see this breakout continuation on the upside confirm or the Momentum Reversal (TM) instead will depend upon smaller changes in momentum intraday and a break in the channel of the past two weeks will provide confirmation, albeit not typically the best entry triggers. (These occur intraday on the smaller time frames.)
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) ended the day on Tuesday with a gain of 69.78 points, or 0.56%, and closed at 12,462.47. Twenty-three of the Dow's thirty index components posted a gain. The strongest performers were Bank of America (BAC) (+5.74%), Caterpillar (CAT) (+2.95%), and United Technologies (UTX) (+2.60%). The weakest were General Electric (GE) (-0.74%) and Cisco Systems (CSCO) (-0.74%).
Alcoa (AA) (+0.21%) originally has a strong start for the day after posting quarterly results Monday evening. The company met earning estimates and offered a positive outlook, providing a strong start to unofficially kick off earnings season. Nevertheless, the early gains were quickly erased. The reason was largely technical. The opening gap hit equal move resistance compared to the rally AA had heading into Monday morning. It was bid up again into the close on Monday and sharply higher afterhours, leaving it exhausted by the time the market opened on Tuesday. The gap quickly filled, but it still managed to close in positive territory.
The S&P 500 ($SPX) finished the session with a gain of 11.38 points, or 0.89%, and closed at 1,292.08. The top performing industry groups were the financials (+2.0%) and materials (+1.8%). The strongest individual percentage performers in the index were Borgwarner Inc. (BWA) (+12.26%), Life Technologies Corp. (LIFE) (+8.25%), and Genworth Finl. Inc. (GNW) (+7.39%). There were no declining industry groups. The weakest individual performer was Tiffany & Co. (TIF), which fell 10.46%. Its holiday sales were lower than expected, leading the company to drop its full-year profit forecast. Other top decliners included Goodyear Tire & Rubber (GT) (-8.31%) and Cablevision Sys. Corp. (CVC) (-3.42%).
The Nasdaq Composite ($COMPX) ended the session higher by 25.94 points, or 0.97%, on Tuesday and it closed at 2,702.50. The strongest performers in the Nasdaq-100 ($NDX) were Life Technologies Corp. (LIFE) (+8.25%), Baidu Inc. (BIDU) (+5.64%), and First Solar (FSLR) (+5.24%). The weakest were Netflix (NFLX) (-2.39%) and Marvell Technology Group (MRVL) (-1.45%).
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.