Market Ends Week With Worst Day of 2010

Market Ends Week With Worst Day of 2010

(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! Going into Friday's session, the indices were not showing a particularly strong resolve one way or the other. The index futures had three waves of selling into midnight, which created strong support into midnight (which I shared with FaceBook), but then it hit a snag at the 4:00 am ET correction period after a 2-wave correction off the lows. This came in short of the earlier highs, however, and by holding that level it started to finally show a larger bias in favor of the bears in premarket trade. Another three wave selloff followed into the 7:00 am ET correction period. The market then corrected once again into the opening bell.

The day's news, however, was not met with good cheer. J.P. Morgan (JPM) reported its quarterly earnings and the bottom gave way. Despite a late-day recovery, Friday's session was the largest daily loss of 2010. JPM posted both weaker-than-expected revenue and an uninspiring outlook despite quadrupling its fourth-quarter earnings. The financials ended up being among the day's worst-performers. Bank of America (BAC) led the Dow's losses, down 3.33%. JPM posted a loss of 2.26%. Intel (INTC) did not help matters. It was the Dow's second-worst performer with a loss of 3.17% following its Thursday afternoon earnings report even though it posted its most profitable quarter ever. In the Dow Jones Industrial Average ($DJI) on Friday, only Kraft (KFT) (+1.58%), Home Depot (HD) (+0.95%), and Pfizer (PFE) (+0.57%) posted gains. The index as a whole ended the session lower by 100.90 points, or 0.94%, to end the session at 10,609.65.

Dow Jones Industrial Average ($DJI)


On the economic data front, several numbers came out on Friday. First, the Labor Department reported that its Consumer Price Index rose 0.1% in December. In a separate report, the Fed stated that industrial production rose 0.6% in December. Additionally, the Empire State manufacturing index rose from 4.50 to hit 15.92 in January. Later, the Reuter/University of Michigan Surveys of Consumers showed little change in consumer confidence levels, despite expectations that we would start to see some improvement.

Even though the market did not display much reaction to the early morning data, the mood was set for a strong morning breakdown when the initial move out of the open sharply broke the lower trend channel from the previous session in which the indices had hugged the 15 minute 20 period simple moving averages. This slower momentum move, followed by a sharp break of the channel triggered a type of double top on the 15 minute time frame and the pace of the breakdown created the high probability that the indices would at least fall back to the previous zone of lows. In this case, that meant the zone from January 12th-13th.

S&P 500 ($SPX)


In Friday's column, I wrote about the inverted "V" the index futures had made heading into the day. This created a pivot low from the "V" on that time frame that formed from the 11th-14th, followed by the reverse off highs. This generally leads to a longer trading range, which left us with that bias heading into Friday session. The market pulled back and held within that larger trading range. Not only did the market selloff strongly as it fell into the lower end of that range, however, it did so with better volume than we have seen in over a month of trade. This increase in volume will not always lead to a continuation move on the downside, but it does increase the risk.

There isn't any change in pace to indicate a high probability breakout direction from this range. The lower end of the range is holding as support going into Tuesday morning after the extended holiday weekend. The upper end of the range will continue to act as support. This is a great type of market to also implement Fibonacci retracement levels since the indices hold those zones very well. You can add them by drawing Fibonacci lines from Thursday afternoon highs to Friday's mid-day lows. Most charting platforms offer this feature and will automatically add the retracement levels when you connect those two points.


Nasdaq Composite ($COMPX)


The S&P 500 ($SPX) fell 12.43 points, or 1.08%, and closed at 1,136.03. One of the best performers in the S&P 500 was Sprint Nextel Corp. (S). It rose 3.52%. Another top gainer was Valero Energy Corp. (VLO), which rose 2.74%. SLM Corp. (SLM) was the S&P 500's worst-performer. It fell 6.68%. Micron Technology (MU) was the second-worst performer with a loss of 5.59%. Bank shares were particularly weak following the selloff in JPM. As a whole, the sector ended lower by 2%. Industrials and technology shares also felt heavy selling pressure.

The Nasdaq Composite ($COMPX) fell 28.75 points, or 1.24%, and it closed at 2,287.99 on Friday. Check Point Software Tech. (CHKP) was the best-performer in the Nasdaq-100 with a gain of 0.91%. Baidu Inc. (BIDU) followed with a gain of 0.74%. KLA-Tencor (KLAC) was the biggest loser, down 4.74%. Applied Materials (AMAT) fell 4.32%. Marvell Technology Group (MRVL) was the third worst performer with a loss of 4.02%.