Monday's Rally Falls Apart on Heels of Economic Data

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

Monday's Rally Falls Apart on Heels of Economic Data

(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 indices opened well on Tuesday morning. They had held the previous afternoon's range into the open and pushed higher for the first 15 minutes of the day. Then the 9:45 ET correction period hit. It is common for the market to reverse course at this point and this was the case on Tuesday as well.

The reversal off highs was assisted by some rather disappointing economic data. Even though home prices declined by less than had been expected, down 18.1% year-over-year in April, the S&P/Case Shiller home price index still continued to decline. It has done so ever since July 2006.

The Conference Board's consumer confidence index was even more dismal and had the greatest impact on the morning's intraday action. The June reading on consumer confidence fell to 49.3 in June. It had been revised to 54.9 in May and economists were expecting it to increase to 55.3. The reaction was immediate. The market gave way to a sharp wave of selling that quickly wiped out the previous day's gains.

Dow Jones Industrial Average ($DJI)


The follow-through on the report led to three distinct waves of selling on the S&P 500 on a 2 minute time frame. The trend exhausted itself into 10:30 ET and the market held support for awhile as it adjusted to the pace of the extreme selloff. It was too steep to prevent further erosion in prices, however, and the S&P and Dow both stepped lower into 11:30 ET. This shifted the pace in that index to created a momentum reversal that pulled the indices higher into 12:30 ET.

The Nasdaq bounced more strongly off the 10:30 ET lows, so it didn't experience the rounded lows seen in the S&Ps and Dow. This made it easier for this index to test slightly lower lows mid-day. It also created a momentum reversal, but it did so on the 15 minute time frame instead of the 5 minute, which allowed for a stronger reaction into the close. It triggered coming out of the 14:00 ET correction period, which also corresponded to a 15 minute Phoenix™ trigger in the S&Ps and Dow.

Once the 5 minute 20 sma broke on the upside it served as support and held throughout the remainder of the session. All three of the major indices ran into trouble with the 5 minute 200 sma however in the final 30 minutes of trade and fell into a range into afterhours trade while it corrected off that resistance level.

S&P 500 ($SPX)


This week's heavy economic data front continues on Wednesday when the ISM's Manufacturing results will shed further light on the state of the economy. This will be followed on Thursday by the Bureau of Labor Statistics publishing the official estimates for Nonfarm Payrolls. These both have the potential to swing things around over the next two days, particularly if the data doesn't fall in line with expectations. Remember: The U.S. markets are closed on Friday in observance of the 4th of July holiday, so expect action to be particularly light on Thursday.

My larger daily outlook remains the same as yesterday and I continue to favor a larger time frame correction in the making. The pace of the current correction higher off the daily support is enough to allow the markets to attempt a retest of the highs or even a slightly higher high, but this would merely serve to shift the pace of the buying even further and increase the risk for a more rapid price correction on the weekly time frame as opposed to a correction over time with an extended congestion zone.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) fell 82.38 points, or 0.97%, to close at 8,447.00 on Tuesday. The index ended the quarter higher by 11%. This was the best quarterly return in 6 years. It was down 0.6% in June and down 3.8% year-to-date. Six of the Dow's 30 index components closed in positive territory despite the large losses seen throughout the morning. They included Intel (INTC) with a gain of 1.04%, McDonald's (MCD), Merck (MRK), 3M (MMM), Bank of America (BAC), and Travelers (TRV). The last 5 had fractional gains. Caterpillar (CAT) was the largest decliner, down 4.89%, followed by a 2.43% loss in American Express (AXP), and a 2.16% loss in Procter & Gamble (PG).

The S&P 500 ($SPX) fell 7.91 points, or 0.85%, and closed at 919.32. The index ended the quarter higher by 15.2%, which is its best quarterly performance in over 10 years. It remained virtually flat for the month of June and is up 1.8% year-to-date. Crude oil futures were down from $71.49 to $69.89 a barrel, and continues to remain in a congestive zone on the daily time frame that can easily last for several more weeks due to the 200 day simple moving average resistance lingering overhead.

The Nasdaq Composite ($COMPX) fell 9.02 points, or 0.49%, and it closed at 1,835.04 on Tuesday. The Nasdaq has been the best-performing index for the year-to-date and is up 16.4%. It is up 20.1% for the quarter and ended the month of June higher by 3.4%.

Forex Outlook:
The GBP/USD pair saw a strong breakout trigger as a buy signal on Monday. As I mentioned yesterday, the weekly trend is extended and has potential to create the handle on a weekly cup-with-handle. This played a role in the early morning turn-around on Tuesday, but not before it hit new highs for the year, which could have trapped a number of late breakout players not paying enough attention to the larger trend.
The NZD/USD pair also broke higher on Monday and continued into Tuesday morning. Like the GBP/USD, this breakout also is plagued by higher risk, so upside continuation activity is bound to be choppy. Pay attention to changes in momentum on a 60 minute with slower upside that can indicated sharp downside flushes.
The USD/JPY is forming a weekly Phoenix™.
The USD/CHF is forming a weekly bear flag, but can easily hold the congestion for another month. It was only a few days ago that China urged the creation of a new international currency, but backtracked off the hard-line on Monday morning and stated that it didn't wish to see any sudden policy changes.
The USD/CZK hit strong daily support on Tuesday and is poised to continue to correct higher off this zone with the 20 and 50 day simple moving averages acting as primary resistance levels.
Although not a popular pair, the USD/LVL (LVL=Latvian Lats) is forming a daily reverse head-and-shoulders buy setup after two waves of weekly selling into strong monthly support and looks to head higher into the end of the summer.