Market Whip-Saws, Correcting Through Time (Note: Unless otherwise stated, the index action described below relates to the EMini 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.)
Good day! The market experienced strong action in both directions on Thursday. As I posted in yesterday's column, the index futures were forming a 60-minute Avalanche™ pattern heading into Thursday's opening bell. This it the first continuation pattern to kick off a downtrend with the first lower high, followed by the break lower that leads to the first lower low. This setup followed through with a breakdown in 22:00 pm ET into midnight on Thursday. It then continued when a premarket base from midnight into the early-morning economic data at 8:30 am ET was followed by even stronger selling into the opening bell.
On Thursday the Labor Department announced that initial jobless claims rose by 22,000 last week to a seasonally adjusted 496,000. Claims were expected to have fallen to 460,000. The four-week average rose 6,000 to 473,750. The durable goods orders were also disappointing. Even though durable-goods orders were up 3% in January, the increase was due to a sharp increase in transportation orders. Excluding these, orders were down 0.6%.
Dow Jones Industrial Average ($DJI)
The market has been struggling over the past week as it reacts to resistance on the daily time frame, so the dismal news rocked the bulls... at least temporarily. The extreme premarket selloff led to a substantially larger-than-average gap in the indices. Such gaps have a very difficult time following through in the direction of the gap on the same day of the gap when they occur in the indices. Thursday's session began with the indices hitting equal move support on the 15 minute time frame as compared to the drop earlier in the week. This, along with the gap size, helped the market curtail further selling despite a premature continuation attempt at the 5 minute 20 sma intraday at 11:00 am ET.
The late-morning continuation attempt on the downside resulted in gradual selling back into the zone of the morning lows that helped shift the momentum on a 5 minute time frame. The indices continued to change pace into the 12:00 ET correction period. The market rose back to the highs of the intraday range and then hugged that resistance level into the early afternoon.
Volume was at its lightest levels of the day as the market reacted to the upper trend channel intraday. This supported a bias in favor of a break higher out of the trading range. This breakout triggered shortly after 13:30 ET and led to a sharp continuation higher into the 5 minute 200 sma, which hit at the 14:00 ET correction period. A brief correction followed before the indices continued higher into the closing bell coming out of the 15:00 ET correction period. The base at highs from 14:00-15:00 was relatively brief compared to the rally into 14:00 ET, so the follow-through into the close was more gradual, albeit steady. The gap zone closed by the end of the day.
S&P 500 ($SPX)
The Dow Jones Industrial Average ($DJI) ended the session on Thursday at 10,321.03 with a loss of 53.13 points, or 0.51%. Only a handful of Dow components posted a gain. The top three included Alcoa (AA) (+1.91%), Bank of America (BAC) (+1.35%). and WalMart (WMT) (+0.43%). The top losers were Coca-Cola (KO) (-3.70%), DuPont (DD) (-1.35%), and Merck (MRK) (-0.97%). KO's losses came after the company announced plans to buy the majority of its largest bottling company, Coca-Cola Enterprises (CCE). CCE was the S&P 500's best-performer. It rose 32.85%.
The S&P 500 ($SPX) fell 2.30 points, or 0.21%,and closed at 1,105.24. The second-best performer was Dr. Pepper Snapple Group (DPS) (+11.10%). Express Scripts (ESRX) (+8.52%) and Iron Mountain (IRM) (+7.08) were also top leaders. Among the losers were Monsanto (MON) (-3.86%), Fifth Third Bancorp (FITB) (-3.86%), and KO.
The Nasdaq Composite ($COMPX) fell 1.68 points. or 0.08%, and it closed at 2,234.22 on Thursday. ESRX was the Nasdaq-100's best-performer. Liberty Media (LINTA) followed with a gain of 8.20%. Flextronics (FLEX) (-2.38%) was the worst-performer, followed by Yahoo (YHOO) (-2.25%).
In other markets, crude oil futures ended the session lower by $1.83 a barrel at $78.17 in New York, while gold rose to $1,108.50 an ounce. The U.S. Dollar Index slipped from 80.915 to 80.86.
Nasdaq Composite ($COMPX)
I was expecting the market to correct longer, at least through time, heading into the weekend as a continued reaction off last week's daily resistance. The rally into Thursday's close leaves the market attempting to change momentum to allow for further upside, but this is still going to be a difficult task to accomplish without another pullback or 30 minute base. The rounded highs afterhours on Thursday could easily generate such a pullback into Friday morning, because this is another attempt to change momentum. This time it's a reaction to price resistance. As a result, the 60-minute bias remains choppy and bearish.
Disclaimer: Trading in securities may not be suitable for all individuals. Consult your broker or other professional to determine your suitability. This is not an offer to buy or sell securities. The advice given above is of a general nature and should not be taken as a recommendation to buy or sell the referenced security.
Note: Tőzsdeklub 2006 Kft is authorized to syndicate my Daily Market Action Letter on the Tozsdeklub.com site. Toni Hansen
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