Market Recovers Friday's Losses

Market Recovers Friday's Losses

(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! Drug makers and health-care stocks led the market strongly higher on Tuesday. Massachusetts held a special election to fill the vacancy left following the death of Democratic Senator Edward Kennedy. This particular election stands out since the win by Republican candidate Scott Brown means that the Republicans can now filibuster the health care legislation, allowing for the introduction of compromises that would be more favorable to private-sector health care.

The market had ended last week with the largest one-day loss of 2010, but the index futures turned higher on Friday afternoon and kept going in Monday's abbreviated futures session. Even though they sold off in premarket trade, at 8:00 am ET they hit another solid low and turned higher on stronger momentum. The indices then formed a strong, two-wave continuation buy setup with a consolidation between 8:30 am ET to 9:30 ET that broke higher with the opening bell. An extreme momentum move followed as the indices soared into the zone of last week's highs. As expected, this zone served as very strong resistance and the buying slowed dramatically following the 10:15 ET correction period.

Dow Jones Industrial Average ($DJI)


Tuesday's reversal continued the larger 60-minute trading range with another "V" low. This continues to leave us without a strong bias for a breakout, however, since the pace on both Friday's selloff and Tuesday's rally were stronger-than-average. The most ideal development for a trading range break is to monitor the waves of action within the range itself for a slower-paced move. When a security has a more gradual pullback off the highs of a range than the average move within the range, then it will indicate a high probability for an upside breakout. On the other hand, a more gradual move higher off the lows of a range is the most favorable for a break lower.

Breakout are still common that do not offer this glimpse into the future via a change in momentum, but they have a much higher risk of breaking the channel only to pull back into it relatively quickly. At times this will merely be a retest of the channel before continuing in the direction of the initial breakout, but at other times the breakout will fail completely. Either situation can be problematic not only due to increased risk as a result of larger stop levels placed under the entire range, as opposed to the final portion of the range, but also the affect longer follow-through time can have upon a trader's patience and confidence.

The market rounded off at the upper end of the 60-minute trading range on Tuesday afternoon. This led to a selloff afterhours. So far the pace of that selloff has been more gradual that the morning's upside. For the range to break higher, it is ideal that the correction holds above a 50% retracement of the day's range.

S&P 500 ($SPX)


The Dow Jones Industrial Average ($DJI) rose 115.78 points on Tuesday, or 1.09%, to end the session at 10,725.43. Drug-makers Merck (MRK) (+2.91%) and Pfizer (PFE) (+2.62%) led the Dow. At the opposite end of the spectrum was J.P. Morgan (JPM), which fell 0.92%. Kraft (KFT) followed. It reversed course along with the rest of the market. Since it had posted a strong gain on Friday, however, this reversal was not a favorable one. It ended the session lower by 0.57% after Cadbury accepted its increased buy-out offer. Boeing (BA) and Alcoa (AA) were the only other two Dow components to post a loss, albeit minor ones.

The S&P 500 ($SPX) rose 14.20 points, or 1.25%, and closed at 1,150.23. Ciena Corp. (CIEN) was the best-performer in the S&P 500. It rose 11.01%. Williams Cos. Inc. (WMB) followed with a gain of 8.10%. Sprint Nextel Corp. (S) was the worst-performer with a loss of 3.66%.

The Nasdaq Composite ($COMPX) rose 32.41 points, or 1.42%, and it closed at 2,320.40 on Tuesday. Garmin Ltd. (GRMN) was the best-performer in the Nasdaq-100 with a gain of 5.61%. Apple (AAPL) was the second-best performer with a gain of 4.42%. Baidu (BIDU) was the worst-performer. It fell 5.74% after three days of strong gains on speculation of Google pulling out of China.

Nasdaq Composite ($COMPX)