Dollar Drops While Dow Hits New High on the Year

Dollar Drops While Dow Hits New High on the Year

(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! Most of the action in recent weeks has been highly affected by news. Earnings season is winding down and economic data ranging from housing to the jobs market has been creating a great deal of volatility. Last week it was interest rate decisions around the globe and the most recent unemployment data that captured the most attention.

After the Federal Reserve announced no change in interest rates, the market seemed uncertain what to do with the news. The initial reaction was a selloff, but it recovered and spent the next several days in a range despite largely favorable earnings and an unemployment rate of 10.2%.

The G-20 finance ministers met over the weekend and provided another way to fuel market action on Monday. The G-20 concluded that they would give the economy a little more time to recover before making any major policy shift. Even though some countries have raised interest rates recently, they agreed that stimulus packages should remain in place for the time being.

Dow Jones Industrial Average ($DJI)


The index futures turned higher on Sunday evening. The upside continued steadily into the opening bell on Monday morning. The result was a large gap higher that took the indices out of the trading range from the previous two days. As we were heading into Monday's session I was not expecting such a strong day, although the odds had increased for a retest of the daily highs at some point this week. This put the market on course for a larger trading range, but the gap increased the overall momentum on the rally off last week's lows and the stronger Dow was able to break the previous highs as it continued to hold the daily uptrend channel.

Monday's breakout from the 30 minute trading range created the environment for a nice gap play in the indices. When the indices experience a larger-than-average gap that breaks it free from a trading range, then a strong setup occurs when the 15 minute highs are breached. On Monday, a breakout first took place over 5 minute highs, but continued shortly after 9:15 ET as well. If the 15 minute highs break, then the odds are in favor for a morning uptrend. Since the setup on Monday was also a continuation of a 30 minute breakout, it also increased the odds for a trend day.

The uptrend throughout the session was not an easy one for those looking for technical triggers to jump on board. Each of the corrections within the trend lasted for varying amounts of time. Irregular trends such as this will make it more difficult to judge when the end of the trend may occur. The choppier action also makes it easier to be whipped out of a position since setups in the direction of the trend will be faced with a lot of back and forth price action as the market progresses and rapid breakdowns are common. Despite this, many individual stocks had more regular trends intraday on Monday that provided stronger setups than the overall market. The morning breakout in RIMM and afternoon breakout in LBTYA were two such examples.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) rose 203.52 points, or 2.03%, on Monday to close at 10,226.94. Surprisingly, not all of the Dow managed to post a gain. Kraft (KFT) came in short with a loss of 0.93%. KFT, however, was the only loser. American Express (AXP) was the biggest gainer. It rose 4.94%. it was followed by a 4.78% gain in Bank of America (BAC). Caterpillar (CAT) came in third with a gain of 4.17%.

Meanwhile, the S&P 500 ($SPX) rose 23.78 points, or 2.22%, and closed at 1,093.08. Radioshack (RSH) has been one of the S&P's best performers recently thanks to a large rally in mid-October. It was once again up sharply on Monday and closed higher by 14.26% after an upgrade following the announcement that it will begin to sell Apple's iPhone. Although RSH was one of its best performers, all 10 of the sectors in the S&P 500 posted a gain.

The Nasdaq Composite ($COMPX) rose 41.62 points, or 1.97%, and it closed at 2,154.06 on Monday. Only 11 of the Nasdaq-100 components posted a loss.

Nasdaq Composite ($COMPX)


Crude oil futures rose from $77.43 on Friday to end the session on Monday at $79.43 a gallon. The average price of regular gasoline now stands at $2.68 a gallon. Additionally, gold broke $1,100 an ounce for the first time and closed at $1,101.40 (XAU/USD). As I mentioned yesterday, however, the uptrend is currently very extended and is favoring a correction in the very near future. This will make further investments at this level higher risk, although a correction will not likely get off to a rapid start.

The momentum on the daily time frame will also make it difficult for the overall market to correct quickly. The previous highs in the S&P 500 and Nasdaq remain strong resistance, as will the upper end of the daily trend channel in the Dow, but the market will favor rounded highs for a correction from the buying as opposed to a sharp reversal.