Market Ends the Week Lower

Today's Commentary:
Note: Current contract month for the futures is now September.

Market Ends the Week Lower

(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 wrapped up the week on Friday with a weekly loss for the first time in five weeks. Friday's session alone, however, was mixed. Despite posting strong gains into the opening bell with a large gap higher, only the Nasdaq managed to end the session higher than it began. Volume on the NYSE was approximately 25% above the recent average, but this can easily be attributed to the quarterly rebalancing of the S&P 500 and Nasdaq, as well as quadruple witching with the expiration of stock and index options and index and single stock futures. From a technical standpoint the markets merely maintained the bias of the prior several days and stuck to our expectations for the day.

Dow Jones Industrial Average ($DJI)


After hitting support last Tuesday, the indices have fallen into a low-level range or congestion. They have paced slightly higher since Wednesday, but the overall momentum has been more gradual than the descent, despite some rapid upside moves on the shorter time frames, such as the overnight gap and initial continuation into Friday's opening bell. The Nasdaq did quite well out of the open. It was the only one of the three major indices to break the zone from the 15 minute highs, but since the Dow and S&Ps failed to confirm, we did not see the typical continuation gap strategy many of you have likely seen me discuss in earlier columns.

Essentially, my "larger-than-average index gap strategy" consists of marking the 15 minute highs and lows and initiating a position in the direction the indices break. Risk is always higher if the trigger is in the direction of a trend that has been in play for several days already or if there is immediate and larger time frame resistance that hits within those first 15 minutes. In this case both of these red flags were raised. The S&Ps and Dow had already been trending highs for about two days, while the upper end of the 15 minute trend channel was overhead for resistance, as well as the 20 day sma. In the Nasdaq the 10 day sma was overhead, as was the 15 minute 200 sma, and both hit within the first 15 minutes of the session.

S&P 500 ($SPX)


Even though the market failed to adequately break the 15 minute highs, the indices did not immediately turn in unison to close the morning gap. The S&Ps and Dow flushed lower into 10:15 ET, but they held the 5 minute 20 sma and came back for a second test of the highs, which would have hit stops for those that took the gap closure trigger despite the lack of Nasdaq confirmation based upon their relative weakness. Luckily that did not happen and the fact that the indices merely paced higher at about the same momentum as the 5 minute 20 sma led to a stronger short setup coming off the double top.

Nasdaq Composite ($COMPX)


The Nasdaq still attempted to push to highs again into 11:00 ET, but it lacked any volume confirmation and stopped dead in its tracks when the S&Ps and Dow tested morning highs. These two indices broke the day's lows coming out of the 12:00 ET correction period and a corresponding breakdown on the Nasdaq led to 30 minutes of strong selling before the S&Ps found support with the closure of the opening gap zone and the Nasdaq hit support at the 15 minute 20 sma and opening lows.

Even though the indices tried once again to break lower out of the 14:00 ET correction period, this move was premature compared to the late-morning decline. The correction off support leading into the bear flag lasted only 90 minutes. When compared to the previous downside action, it should have lasted approximately twice that in order to sustain a move similar to the morning drop. Nevertheless, it was still a decent scalp move, lasting about as long as the continuation out of noon before pulling back up off 14:30 ET lows.

The Dow Jones Industrial Average ($DJI) fell 15.87 points, or 0.19%, to close at 8,539.73 on Friday.The index ended the week of 2.9%. On Friday the financials were amongst the strongest in the index. Bank of America (BAC) led with a gain of 2.48%, followed by a gain of 2.43% in JP Morgan (JPM), and a 2.24% rally in American Express (AXP). Microsoft also did well with a gain of 2.43%. Just over half of the index posted losses, however, with the largest in Kraft (KFT) (-1.70%) and Coca-Cola (KO) (-1.49%).

The S&P 500 ($SPX) rose 2.86 points, or 0.31%, and closed at 921.23. The S&Ps ended the week down 2.7%. Friday's losses were concentrated in defensive sectors, such as utilities, telecom, and consumer staples, as well as energy. Crude prices fell 2.6% to end the session at $69.55 a barrel.

The Nasdaq Composite ($COMPX) gained 19.75 points, or 1.09%, and it closed at 1,827.47 on Friday. This amounted to a 1.7% loss for the week. On Friday, however, the tech stocks made strong gains and were up 1.2% overall despite losses in Research In Motion (RIMM) after it posted better-than-expected quarterly earnings and an in-line quarterly forecast after Thursday's close.

In Monday's session we should start to see market players positioning themselves for Wednesday's Federal Reserve announcement at the conclusion of this week's two-day FOMC meeting. We are still deeply entrenched in a recession and the fact that the economy is deteriorating at a slower rate does not mean we are out of the woods. The eyes will be on the Fed in anticipation of not only whether or not rates change, but particularly the wording accompanying the rate news and whether it hints at rate increases before the end of the third quarter.

Current technical action suggests that this zone of daily support will hold into the news, but the overall bias given the pace of recent price action is still more bearish and the 50 day sma remains a magnet. Even if the market does attempt to pull higher this week, I do not expect any strong break of the previous daily highs and such a test would merely serve as an even stronger reversal pattern for selling into at least the end of the summer.