Busy Week for Economic Data and Earnings

Busy Week for Economic Data and Earnings

(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 faced heavy losses last week despite an attempt to hold lows on Thursday. The major indices not only posted a loss for the week, but for the month of October as well. Market volatility has been extremely high over the course of the past week with multiple 100+ point swings in the Dow. On Friday the index wiped out a 200 point gain made the day before and another 50 points for good measure. The VIX, which is widely followed as a measure of volatility in the markets, rose 24% on Friday alone.
Dow Jones Industrial Average ($DJI)


In the week ahead you can continue to expect the market to generate high levels of volatility. Earnings season is in full swing and many of the world's central banks will be announcing their interest rate decisions throughout the course of the week. On Wednesday, the FOMC will announce its interest rate decision. It is expected to leave them unchanged, but all eyes will be upon the wording of its accompanying statement regarding whether or not there is the hint of a rate increase in the near to intermediate future, which would most likely boost both the dollar and oil. This possibility can merely be implied if the statement fails to include wording such as keeping rates low for an "extended period". The Reserve Bank of Australia, the Bank of England, and the European Central Bank will also be making their own announcements this week. Additionally, in the U.S. we will be awaiting this week's Congressional votes on extending homebuyers' tax credits, healthcare, and financial regulation. Any one of these categories will increase volatility, so put them all together and it's hard to know just what will come out on the other end.

It should come as no surprise that as volatility increases, so does a trader's risk (as well as their reward) potential. In order to keep things in balance, be sure to adjust share and contract size according to set risk parameters. If a typical resistance level such as the high of a trading range on the ES (S&P 500 eMini futures contract) generates a stop above that resistance on a short position of about 3 points, then when volatility increases, the range will also tend to widen, generating a larger stop. In order to keep your risk balanced, you would need to cut down the number of contracts traded so that your average loss on a typical breakdown setup is not substantially higher on wider volatility days then it is on average. This will help prevent larger losses when volatility increases, even though it can also limited larger gains. With time, you will start to learn when you can risk more on certain strategies and in certain markets.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) fell 249.85 points, or 2.51%, on Friday to close at 9,712.73. Every single one of the Dow's 30 index components posted a loss. The financials were the hardest hit. Bank of America (BAC) led the way with a loss of 7.31%. J.P. Morgan (JPM) followed with a loss of 8.52%. American Express (AXP) fell 4.39%. Other top losers were Alcoa (AA) (-4.46%), General Electric (GE) (-4.10%), and Travelers Companies (TRV) (-4.08), which all lost more than 4% of their share value on Friday alone. For the week as a whole, the Dow closed lower by 2.6%. It remains up 10.7% YTD.

Meanwhile, the S&P 500 ($SPX) fell 29.92 points, or 2.81%, and closed at 1,036.19. Less than 4% of the S&P 500 index components posted a gain on Friday. Among them were Harman Intl. (HAR) (+13.97%), Eastman Kodak (EK) (+8.07%), and Genworth Finl. (GNW) (+4.32%). The S&P 500 ended the week lower by 4%. Gannett Inc. (GCI) was the biggest loser. It fell 10.56%. It was followed by a 9.33% loss in New York Times Co. (NYT). The S&P 500 overall is up 14.7% YTD. Crude oil futures closed at $77.00 a barrel on Friday, down 4.3% on the week. They are still higher by 72.6% YTD.

The Nasdaq Composite ($COMPX) fell 52.44 points, or 2.50%, and it closed at 2,045.11 on Friday. It ended the week lower by 5.1%, but remains up 29.7% YTD. Only 2 of the Nasdaq-100's index components posted a gain in Friday's session, and only fractionally.

Nasdaq Composite ($COMPX)


Even though the market posted some extreme losses on Friday, the session did not begin on such a harsh note. Losses were relatively minor until the 11:00 ET correction period, but continued downside was hinted at early on. The market fell into 10:00 ET just enough to confirm a break in Thursday's uptrend channel before falling into an ascending triangle on the 5 minute time frame. The pace of upside within the range slowed compared to the downside. This upside also lacked as much volume as the selling. These combined and led to the creation of an Avalanche™ setup on the 15 minute time frame, while allowing traders to take advantage of 5 minute action for better timing off the 5 minute 20 sma zone coming out of 11:00 ET.

The initial selloff out of 11:00 ET took the S&Ps and Dow back to Thursday's opening price for initial support while the weaker Nasdaq hit support at Thursday's lows at the same time. This support was very temporary, even though it came at the 12:00 ET correction period. The pace and volume on the selloff confirmed the higher probability for continued downside into the afternoon. Instead of forming a longer continuation pattern in the early afternoon, however, the market continued to step lower on the 2-5 minute charts into 13:30 ET. The remainder of the session was weak, but the market rounded off at lows and did not make substantially lower lows from 13:00 into the close.

Currently the market is still holding the lows of the daily trend channel in both the S&P 500 and Dow, while the Nasdaq has broken this support level and is now heading into the previous daily low. I am still not expecting the Dow to break its channel early this week, but I am expecting that 100 day sma to still hit this month. The current downside momentum can easily make that happen even sooner than I was initially expecting. The market will continue to have some decent upside moves intraday, but it should be more difficult to sustain multi-day upside moves for awhile without a great deal of overlap from day to day. This will make swingtrades on the upside higher risk and lend favor to shorter-term intraday action.