Stock Market Holds Trading Range
The market had a very strong showing this past week following a larger-than-expected 50 basis point rate cut by the Fed. The S&P 500 rose 2.8% on the week, while the Nasdaq Composite climbed 2.7%. Nearly all of the week's gains, however, came on Tuesday immediately after the announcement. Some follow-through occurred heading into Wednesday morning, but ever since then the markets have been stuck primarily in a trading range. The dollar hit record lows over the past couple of days, while crude oil is once again at record highs. The credit woes which contributed significantly to the late-summer collapse are also still on many people's minds.
As I mentioned this past week, I do still think that we are going to head for a better test of this summer's highs and are likely to see that happen this coming week. The general zone of those highs will be resistance, but since we have been consolidating the last couple of days, the push to those highs has some better potential to push past the exact price level. The last trading range at highs lasted from the 13th to the 17th, which was three trading days, and broke higher on the 18th with the Fed. Often these corrections are repeated, so since we now have three days of congestion beginning last Wednesday, it's quite possible to begin to move higher early this week. I do not, however, expect a repeat of Tuesday's extreme upside momentum.
Following Tuesday's rally, volume declined throughout the remainder of the week. Even though Friday was more active than Monday, it was the lightest volume of the week following the Fed. The first and final 15 minutes of the day had the strongest activity on this triple-witching Friday when contracts for stocks index futures, stock index options and stock options all expired.
To kick off the day, the markets gapped strongly higher into the open. The markets had begun to turn around following Thursday's afternoon decline almost right away after that day's closing bell. They gained momentum around 3:00 am ET with a rally in the Asian markets. Although the premarket momentum slowed after 4:00 am ET, the indices continued to creep higher. At 8:30 am ET the momentum again began to pick up steam, hitting premarket highs just ahead of the opening bell.
The market hit strong resistance from 15-minute highs of the previous two trading days going into Friday's open and held them very well at the start of the day. Initially I was looking at the potential for the morning gap to close completely in at least one of the indices, but kept in mind that the market has had a lot more exceptions to this larger than average gap closure rule in the past month or so as the phase of the market has changed. Initially the market did a decent job of holding this potential by falling strong into the open off the premarket highs. That momentum slowed, however, as the move came into initial price support from the highs in the Nasdaq and Dow on Thursday.
Thursday's highs held very well as support in the marketplace and the indices began to reverse momentum. They first made their way back to the intraday highs, hitting them at the same time as the 10:15 ET reversal period. They then retested the intraday lows, but at a somewhat more gradual pace than the initial morning decline. This time the lows did not correspond quite as neatly to the 10:45 ET reversal period, but still began to turn back around in that general area. The market tested the intraday highs for a third time around 11:00 ET, breaking quickly through them in the Nasdaq, but stalling in the S&P 500 and Dow.
The mid-day activity in the indices was very sloppy and the volume in the market began to decline dramatically. While the indices continued to push highs, they did so in small spurts of momentum and could not sustain any move. This creates a bearish bias and adds risk to each subsequent test of highs. At 12:30 ET the market gave up on one last-ditch effort and held the price resistance from Wednesday's highs. They turned over slowly at first, but the Nasdaq began to drop sharply following 13:00 ET and the Dow and S&Ps following heading into 14:00 ET.
The market had not been trading that well throughout the day and this became more marked in the final hours of trading. While the three traded in the same general direction, they were constantly switching roles in terms of relative strength leader versus laggard. While the Nasdaq had led on the upside, the greater extension also allowed it to fall the quickest into the early afternoon, but this meant that it also came into support more quickly as well on the 15-minute time frame from the morning highs and the 15-minute 20 sma. So, when the indices again dropped into 14:00 ET, it did not have as much room to move before those support levels hit more securely than compared to the Dow and S&Ps which had not risen much above those same support levels and hence did not view them as strongly as the Nasdaq. They broke them quickly and had little in the way of support until the morning lows.
14:00 ET is a very strong reversal zone in the market. The Nasdaq hit this level as it hit its larger intraday support levels and held it almost perfectly. The S&Ps and Dow slowed their downside momentum into 14:00 ET, but continued lower for several more minutes, bounced into 14:30 ET and then flushed hard into the morning lows and a few ticks beyond into 14:40 ET. The flush took the Nasdaq with it, but the Nasdaq still held the 14:00 ET lows and then made its way back to its intraday highs soon after 15:00 ET. The S&Ps and Dow also moved higher at this time, but they were more choppy and only returned to lower resistance levels such as the breakdown zone in the S&Ps and the 15 minute 20 sma. Another sloppy reversal then took the market back to the zone of the afternoon lows heading into the closing bell.
The Dow ($DJI) closed 53.49 points higher at 13,820.2, while the S&P 500 ($SPX) rose 7 points and closed at 1,525.75, and the Nasdaq ($COMPX) gained 16.93 points and closed at 2,671.22. The Dow was weighed down by Home Depot (HD), which fell 2.4%, and American Express (AXP), which she 1.4% on Friday. On the other hand, Google Inc. (GOOG), which gained 1.3%, and Oracle (ORCL), which rose about 4.4% on earnings, topped the Nasdaq gainers list.
Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.
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