Black Friday Turns Red for the Markets

Black Friday Turns Red for the Markets

(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! Even as many have been cheerleaders for a broader economic recovery over the past several months, news from abroad has shown that there are still many reasons to fret. The biggest news over the holidays came from halfway around the world in Dubai. Dubai World, which is the emirate's real estate investment vehicle, announced that it was seeking to suspend payment on part, or even ALL, of its nearly $60 billion worth of debt for at least six months. This news alone was blamed for the broad selloff that took place overseas on Thursday, leading to a substantial gap lower in the markets in America on Friday morning that ended up culminating in the first weekly loss for the overall markets in nearly a month. It may have been "Black Friday" for retailers, but for the markets it was decisively red.

Dow Jones Industrial Average ($DJI)


All three of the major U.S. indices began the shortened holiday-trading session lower on Friday morning with much larger-than-average opening losses. Extreme gaps either on the upside or downside have a great potential for filling in the gap zone than those that are average to below-average. This is particularly true when the gap lands the indices at strong support or resistance levels, but is not the case when the gap triggers a larger technical pattern. On Friday, however, the former was the case. The Nasdaq index futures began the session at equal-move support on the daily time frame (as shown in the chart in dark green). In the S&P 500, the open came at the 50% retracement level from the early-November rally, the zone of September's highs, and the 20 day simple period moving average. The 20 day sma was also hitting in the Dow, but the retracement level was the 38.2% Fibonacci level and the zone of October's highs.

When I am faced with a gap such as this, my typical strategy is to drop down to the smaller intraday time frames, such as the 1-2 minute charts and even the 100-tick charts. I will then watch the indices intraday on those time frames and look at the initial direction out of the open. I will then watch for a shift in the momentum of that opening move. It the market makes an attempt to close in just a part of the gap and then bases, then I will watch for a break of that base that is also in the direction of a closure of the gap. When that base breaks, it will trigger a setup. Alternately, if there is a very gradual trend move in one direction out of the open, such as a slower-than-average selloff following a gap lower, then it will trigger a setup that is opposite the slower trend. In this case, it would be a buy setup. On Friday, the first strategy prevailed. The market gapped lower, immediately began to close the gap, and then based at highs on a very small intraday time frame before breaking to new intraday highs. The break of these highs triggered a buy according to this strategy.

The market was extremely resilient on Friday morning. Even though it is common for a setup such as this to trigger a decent morning trend, the market barely paused to catch its breath as it moved higher throughout the morning until nearly 11:15 ET. The 2-minute 20 period sma served as support throughout the ascent. By 11:10, however, the pace of the buying began to shift very slightly on the 1-2 minute time frames. The indices pivoted in an inverse-"V" formation into 11:15 ET. and fell with comparable momentum as the rally until hitting the 5 minute 20 sma at about 11:30 ET. The reaction to this support shifted that larger pace. Since the market hugged the market for approximately half an hour before it broke through it, the correction time was slower than in the uptrend and the larger momentum of the price correction became more gradual.

A second wave of selling took place in to 12:30 ET, but it also failed to show strong conviction. Volume was light, even for holiday trading, and the two-wave correction led to a continuation attempt out of 12:30 ET. Without volume to confirm the move, nor a long-enough correction period compared to the AM rally, the market failed to break through the mid-day highs and once again sold off into the closing bell.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 154.48 points, or 1.5%, on Friday to close at 10,309.92. All of the Dow's 30 index components posted a loss. The biggest loser was Bank of America (BAC), which finished the session lower by 3.01%. Caterpillar (CAT) was the second-largest decliner with a loss of 2.69%. Alcoa (AA) followed in third place with a loss of 2.62%. 7 of the Dow index components posted a loss of at least 2%.

Meanwhile, the S&P 500 ($SPX) fell 19.14 points, or 2.10%, and closed at 1,087.27. 496 of the S&Ps index components finished the session lower, meaning that a mere 4 out of 500 posted a gain. Gains in Centurytel (CTL) (+0.25%), Apollo (APOL) (+0.23%), Baxter (BAX) (+0.15%), and Darden Restaurant (DRI) (+0.13%), however, were only fractional. 15 of the S&P 500 index components posted a loss of more than 4%. 79 posted a loss of more than 3%.

The Nasdaq Composite ($COMPX) fell 37.61 points, or 1.73%, and it closed at 2,138.44 on Friday. 97 of the Nasdaq-100 index components posted a loss. Only Warner Chilcott Plc. (WCRX) (+1.03%), Apollo Group (APOL) (+0.23%) and Activision (ATVI) (+0.17%) posted a gain. 29 of them posted a loss of at least 2% for the day.

Crude oil finished the session lower on Friday by $1.98 to settle at $75.98. Energy stocks were the biggest losers as a result. Gold, copper, and silver also pulled back off record-highs.

Nasdaq Composite ($COMPX)


This week is expected to be a "doosey" on the economic front. A great deal of that focus will be upon the jobs front. On Wednesday, payroll provider ADP released its jobs estimates. This will be followed on Thursday by the weekly jobless claims data. Then, on Friday, the Labor Department will reports its numbers for jobs lost the overall U.S. economy in November. Although they are still predicting a loss, it is expected to be by a lesser degree than seen in October. In other news, the Chicago Purchasing Managers index comes out on Monday. On Tuesday the Institute of Supply Management will issues its November manufacturing report, followed by its nonmanufacturing report on Thursday. Also on Tuesday is the National Association of Realtors report on pending home sales. Then, on Wednesday, the Federal Reserve's Beige Book, which offers the Fed's view of the economy.

So far the index futures have been taking back the closing losses on Friday, but the big question will be how the results of Black Friday sales will weigh into Monday's bias and the bigger picture for the remainder of the year. I am continuing to be much more cautious on the upside, particularly on setups that last longer than a day or two. The technical action is continuing to point towards a larger correction off this weekly resistance than a mere pullback lasting a couple of days. With three highs nearly equally spread apart on the daily time frame, this is a typical area for such a correction to hold. We have been watching for it for several weeks already and have seen how the indices have began to correct through time, but still don't have a larger weekly confirmation to show that a larger price correction will also follow.