Market Consolidates into Earnings Season

Good morning! While the market continued to correct off last Wednesday's lows into the weekend, the correction has taken the slower path we were expecting. Instead of rallying strongly off the support from the week's lows, the indices fell into a trading range on the 60 minute time frame and on Friday they gave back a huge chunk of the gains made mid-week.

By the closing bell, the Dow Jones Industrial Average ($DJI) had fallen 246.79 points, or -1.9%, off Thursday's close and ended the session at 12,606.3. The result was a loss on the week of 1.5%, or -5% on the year to date. The S&P 500 ($SPX) lost 19.31 points on Friday, or -1.4%, and closed at 1401.02. The loss for the week came to 0.7%. The Nasdaq Composite ($COMPX) experienced the largest decline on the week and ended lower by 2.6% after adding a 48.58 points loss, or -1.9% move, in Friday's session alone.

Volume remained elevated on Friday. On the New York Stock Exchange it amounted to almost 1.8 billion, while on the Nasdaq about 2.4 billion shares were traded. On both the NYSE and the Nasdaq declining stocks beat out gainers by approximately 2:1, with the Nasdaq ratio slightly higher and the NYSE ratio slightly lower.

Although news on Thursday of a buyout by Bank of America (BAC) bolstered Countrywide Financial's (CFC) well-beaten shares, the enthusiasm waned into the weekend. CFC gave back 17.3% of its gains from the previous session, while BAC fell 2%.

Another big loser on Friday was American Express (AXP), which added to the credit woes by announcing that it would take a record $440 million Q4 charge due to economic strains and downwardly revised its earnings forecast, particularly due to stress in the Florida and California real estate markets. Another credit lender, Mastercard (MA), fell 8.6%, while Discover Financial Services (DFS) lost 3.7% on Friday. Although Capital One (COF) also lowered its profit forecast on Thursday, it held up pretty well on Friday, posting a loss of only 0.8% (a huge feat compared to others in its sector.)

A lot of the market really took its cue from these top losers, boosted mid-day by a speech from Fed Gov. Frederic Mishkin. In it he emphasized a shift in focus away from typical strategies focusing upon incoming economic data to institute policies aimed at growth with minimal inflation and towards action aimed at preventing the most damage in the longer term. In other words, moving away from short-term rate-cut discourse to placing more focus upon proactive measures to prevent longer-term financial havoc.



The weakness in the market on Friday began in Thursday's afterhours and Friday's premarket trading, resulting in a modest downward gap into the opening bell. The market found support immediately at the 5 minute 200 period simple moving average. This stalled the sellers briefly while a range formed along the support before breaking lower into 10:00 am ET. Trade was sketchy from that point on into noon. While the indices established some slightly lower lows, they were quite minor and support levels from the previous session held well. In the Nasdaq this meant Thursday's lows, while in the Dow it was the mid-day lows and then the afternoon lows in the case of the S&P 500.



The S&Ps corrected the strongest into mid-day, but none of the major indices was able to break through the 15 minute 20 period simple moving average resistance and instead the momentum shifted once more into the early afternoon as the sellers began to take over. The downside was steady throughout Friday afternoon, but it remained choppy as well. This resulted in a slower overall downtrend into the close than represented with the gap and morning decline. When the S&P 500 hit Thursday's lows and the Nasdaq hit support from mid-day on Wednesday the downside faltered. Having been put on edge by the sloppy nature of the downtrend, it was easy for the market to pop higher off the strong 15 minute support into the final 45 minutes of trade. This continued into afterhours trading on Sunday.



Going into Friday morning I was expecting that we would hold Wednesday's lows into this week. Friday's performance, however, has me more open to the possibility of another drop on the daily time frame before we see a larger daily and weekly correction. There is still a bit of room before the market hits equal or measured move support on the weekly charts as compared to the drop from October and early November, so the market may attempt to complete that move this week. I will mainly be focused upon intraday time frames since the shifting momentum intraday on a 60 minute time frame is going to be the main clue in determining whether this can play out or not. If the momentum slows on the downside, then the indices will more likely round off at the lows and correct more from here, but if the buying wanes, then it will be easier for the bears to push things lower. We are also heading into earnings season now, so pay attention to major earnings releases when holding overnight.