Indices Suffer Worst Weekly Decline Since March Lows

(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! As speculation abounds as to whether or not Federal Reserve chairman Ben Bernanke will be serving another term, on Friday the market plummeted to new lows for the year thus far. Over the course of the past three days the Dow has gone from the best closing high since last March to its strongest selloff since that same period.

The market has been flirting with monthly resistance levels since the start of the past quarter, but it failed to hold up during the most recent correction month for the markets. As I mentioned several weeks ago, major reversals often take place in January. The last correction month was October, in which the pace of the upside merely slowed, but did not reverse. This time around, the market has failed to be wowed by the latest earnings data and attempts to push to slightly higher highs on light volume finally gave way to extreme profit-taking and panic as the late-comers rushed to limit losses and those holding on from better price levels rushed tto secure as much of their gains as possible.

Dow Jones Industrial Average ($DJI)


The selloff that began on Wednesday and established a second wave of selling into Thursday did not hesitate on Friday morning to confirm that the larger 60-minute range was indeed broken. Despite rounding off slightly in mid-day action on Thursday, the index futures were unable to recover any lost ground overnight and instead opened lower on high volume. The S&P 500 had been basing with the other two indices in premarket trade, but it opened and formed a textbook continuation triangle in the early morning that triggered giong into 10:00 am ET.

The 10:15 ET correction period held as the morning low, but another short triggered out of 11:30 ET. This can be seen clearly on the S&P 5 minute time frame as well with a shift in momentum along the zone of the gap closure. This continued with a low-level base into the early afternoon. After that point the momentum built on itself as panic set in with the break of the morning lows. For the second day in a row the Dow ended with a loss greater than 200 points.

The day's news events did not help lighten the mood. Companies posting good earnings were overshadowed by rising unemployment and futher news from the While House. Early in the day the market was hit by the Labor Department's announcement that unemployment levels rose in 43 states, as well as the District of Columbia, in December. Four states hit record highs. The top two were South Carolina with an unemployment rate of 12.6% and Florida, which hit 11.8%. Overall, however, Michigan's unemployment rate of 14.5% remains the highest. The mid-western "prairie states" have weathered the economic strains the best, despite what Mother Nature has been throwing at them in recent weeks. Respectively, North and South Dakota have the lowest unemployment levels at 4.4% and 4.7%.

In other news, President Obama held a "town hall" meeting in the late afternoon that dealt primarily with his plan to restrict the speculative activities of the big banks. His plan had originally been proposed on Thursday and was cited as an instigato for the day's decline. Technical factors relating to the change in pace and time of the year were still strong motivators, but it's hard to deny the impact this announcement had as well, particularly when the selling pressure increased as Obama took the podium.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) ended the session on Friday at 10,172.98 with a loss of 216.90 points, or 2.09%. Once again, it was surprising that any of the Dow's index components managed to keep their head's above water, but in Friday's session the stock prices for four companies still managed to post a gain. Procter & Gamble (PG) rose 0.79%, General Electric (GE) closed higher by 0.56%, McDonalds (MCD) gained 0. 30%, and Wal-Mart (WMT) rose 0.04%. GE and MCD both had earnings that beat expectations. The heaviest losses were experienced by American Express (AXP) (-8.47%), Alcoa (AA) (-5.96%), Caterpillar (CAT) (-4.57%), and Intel (INTC) (-4.46%). AA's losses came despite the fact that it tripled its quarterly net income. The Dow ended the week lower by 4.1%. Since Wednesday, however, it has fallen 5.2%.

The S&P 500 ($SPX) fell 24.72 points, or 2.21%, and closed at 1,091.76. Intuitive Surgical Inc. (ISRG) was the best-performer with a gain of 11.78%. Huntington Bancshares Inc. (HBAN) was the second-best performer with a gain of 3.53%. Johnson Ctls. Inc. (JCI) came in third with a gain of 2.18% despite giving up most of its opening gap gains. Advanced Micro Devices (AMD) was the worst performer with a loss of 12.35%. Capital One Financial (COF) was the second-worst with a loss of 12.11%. SLM Corp. (SLM) (-11.94%) and Western Digital (WDC) (-10.05%) also posted losses over 10%. The S&P 500 overall ended the week loser by 3.9%.

The Nasdaq Composite ($COMPX) fell 60.41 points, or 2.67%, and it closed at 2,205.29 on Friday. ISRG was the best-performer in the Nasdaq-100. 6 other Nasdaq-100 components posted a gain. Celgene Corp. (CELG) was the second-best performer with a gain of 1.35%. The worst-performers were Joy Global Inc. (JOYG) (-8.18%), Applied Materials Inc. (AMAT) (-7.00%), Marvell Technology Group (MRVL) (-6.18%), and Klac-Tencor Corp. (KLAC) (-6.06%). Google (GOOG) posted earnings on Thursday afternoon, but still failed to impress. Despite strong fourth-quarter earnings with revenue that exceeded analysts' expectations, GOOG fell 5.66% and was the Nasdaq-100's 6th worst-performer. The Nasdaq's losses for the week amounted to 3.6%. All three of the major indices are now down more than 2% for the year-to-date.

In other markets, crude oil futures are down 6.07% for the month and closed lower by $1.54 a barrel on Friday to end the session at $74.54 a barrel, while gold is now off 0.59% on the year. It fell $13.50 on Friday and closed at $1,089.70 an ounce. The 10-yr. Treasury yield ended at 3.6%, down 6.38% year-to-date.

Nasdaq Composite ($COMPX)


Whenever any security or the overall market drops as far and as quickly as the indices did last week, they have a very difficult time recovering quickly. Even when you see a sharp counter-move, they will still tend to turn back around and at least correct through a trading range on the larger time frames. This is going to mean that taking swing trades, and even position trades, as buy strategies is going to continue to be higher risk over the course of the next several weeks. Neverthless, the indices are now very extended on the downside on the 60-minute time frame. We can still see some slightly lower lows at the start of the week, but I suggest sticking to shorter-term, intraday positions for now and avoid overnight holds in general. There will be some exceptions in securities that are not trading in sync with the overall market, but be aware that exceptions are always higher risk when the overall market is not behind them.