Dusting Off My Old Dow 10K Hat... AWW CHOO!

Dusting Off My Old Dow 10K Hat... AWW CHOO!

(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! Well... I suppose that depends on your perspective! As I mentioned in Friday evening's edition, heading into the new week the market's bias was favoring further downside. That downside, however, was a bit more than many had bargained for! The indices once again experienced a larger-than-average gap lower after they continued to slide lower in off-hours trade.

I have spoken a great deal about how to approach such gaps recently, because the market has had more than its fair share of them over the past month. When tracking an opening gap for a bias, the initial step is to measure the highs and lows of the first fifteen minutes of the session. The direction those first 15 minute highs or lows breaks is the direction the market will then favor trending throughout the remainder of the morning. Often the market will give you a heads-up, like it did on Monday when it moved more slowly off the opening lows within a larger all-session base or bear flag that first began to form Sunday evening.

Nasdaq Composite ($COMPX)


After triggering the breakdown, the indices continued rapidly lower into the 10:15 ET correction period. Volume spiked and the correction period held. Given the momentum of the downside move, the market had a difficult time sustaining the reversal off the lows, even though in terms of the price action the indices managed a decent recovery. The downside had not yet established an equal move on a 15 minute all session chart, however, and it left plenty of room for the market to continue intraday. It is difficult to judge this added potential based purely on the charts from intraday price action, but consider that the indices were basing at lows into the open on Monday and take the move off Friday's highs into the gap zone. Then project this middle zone lower to offer the equal or measured move target.

The market's 10:15 ET bounce ran into the 5 minute 20 period simple moving average resistance at about the same time as the 11:15 ET correction period hit. The market slid down this resistance level and then fell into a base into the afternoon. It stepped lower out of that base at about 12:30 ET, but failed to confirm until a second breakdown just prior to the 14:00 ET correction period. This is a typical time in the market for strong moves to take place and the market quickly broke to new lows. The selloff continued until both the S&Ps and Dow hit 5 minute equal move support around 14:45 ET. This also was the equal move level on a 15 minute time frame for the all sessions charts when compared to that afternoon breakdown and continued afterhours selling on Friday. This placed the indices squarely into strong, higher time frame support ahead of the final hour of trade on Monday afternoon.

Dow Jones Industrial Average ($DJI)


By about 14:45 ET the Dow was down 800.06 points with the largest intraday point drop on record, mimicking the losses from just one week prior. Within the final 75 minute of trade, the Dow Jones Industrial Average ($DJI) managed to make back more than half the session's losses. The Dow closed lower on Monday by 369.88 points, or 3.6%, at 9,955. This was the first time the Dow had closed under 10k since October 2004. Bank of America (BAC) closed with the largest losses, down 6.55%, while Alcoa Inc. (AA) lose 5.87%, and General Motors (GM) lost 5.78%. Merck (MRK), Microsoft (MSFT), Citibank (C), and McDonalds (MCD) also all closed with losses over 5%. None of the Dow's 30 components managed to make any gains. The S&P 500 ($SPX) fell 42.34 points, or 3.8%, and closed at 1,056.89. The Nasdaq Composite ($COMPX) dropped 84.43 points, or 4.3 %. It closed at 1,862.96.

S&P 500 ($SPX)


Earlier overseas, the Pan-European Stoxx 600 Index fell 7.6%, for the largest one-day decline on record. Although the President signed in the $700 billion rescue plan passed by the House of Representative on Friday, European leaders failed to reach a consensus on how to cope with the financial crisis it finds itself facing.

Also making headlines on Monday, crude oil futures continued lower by $6.5% to $88.81 a barrel. It is now nearly 40% off its July highs. The national retail price of gasoline also finally continued lower once again from highs of $4.114 a gallon this summer to an average of $3.504 on Monday. As oil prices slid lower, the euro hit a 13-month low against the dollar. The euro to US dollar is at 1.355 currently (11:45 pm ET).

As I mentioned in yesterday's column, the markets are currently in the midst of an exhaustion on on the weekly time frame. We are already experiencing the extension of that move so far this week. The indices had already fallen into the congestion from 2004, which was serving as our larger target. The S&Ps pushed further, but both the Nasdaq and Dow are testing that larger monthly support. I expect the market to experience a larger correction off this zone of support, but since the time frame is quite large, there is a lot of wiggle room in the meantime. It will be very difficult for us to see any strong recovery in terms of price. Upside move will tend to be brief when accompanied with momentum. An example would be the recovery a few weeks ago in both oil prices and the euro. Each was subsequently met with another wave of selling back into the larger support. I think we are in for a bounce in both this week along with the overall market, but we are also wide open for another test of lows later this month or even into early November int he overall market, depending upon how the upcoming correction begins to form.

Dow Closes Over 14K

Good day! The market posted some strong gains once again on Thursday with a large gap higher into the open following a round of strong earnings and continued follow-through from the late day reversal on Wednesday when the market took off into the close after a great deal of weakness earlier in the session. Leading the rally based on earnings was IBM (IBM) after it reported its strongest quarterly performance since 2002. It gapped higher, continued to run for about 15 minute and then held a trading range for the remainder of the day. By the closing bell it had added 4.78 points and 4.3%. In other news, Juniper Networks, Inc. (JNPR) rose 3.33 points, or 12.5%, following an upgrade by Goldman Sachs from neutral to buy.

By sector, one of the top movers were metals and mining stocks. The index itself climbed 2.4% on the day. One of my favorites was Freeport-McMoran Copper & Gold (FCX). It had pulled back nicely into the 10 day simple moving average on Wednesday and then gapped up slightly on Thursday. After a small 15 minute rally it caught my eye when it fell into a range throughout most of the morning. It took off after hitting the 5 minute 20 sma at the 11:00 correction period and climbed throughout the remainder of the day.

Although the market had more than its fair share of upside breakouts, a number of stocks found themselves facing quite a bit of pressure. Alcoa Inc. (AA) fell sharply after an announcement by BHP Billiton PLC (BHP) that it is not longer considering Alcoa as an acquisition target. Qualcomm Inc. (QCOM) also took a hit when Broadcom Corp. (BRCM) and Verizon Wireless (VZ) announced a licensing agreement that will allow Verizon to sell mobile phones which contain a chip made by Qualcomm which was banned by the U.S. International Trade Commission last month. Verizon announced that as a result, it would cease efforts to overturn the ITC ban.

Other stocks which found themselves under water on Thursday were the financials, which continued to feel the strain of subprime woes. Standard & Poor again downgraded more than 400 mortgage-backed securities. Goldman Sachs Group Inc. (GS) fell 1.5%, Morgan Stanley (MS) dropped about 1.4%, and Merrill Lynch & Co. Inc. (MER) shed nearly 1%.

After the strong open, the market had a really difficult time establishing an intraday bias. The result was that even though the indices are still seeing a bit more upside, the range is essentially still in play on the 60 minute charts and our bias has continued to hold well. A great deal of divergence existed on Thursday between the indices themselves. The Nasdaq Composite held the greatest relative strength, forming a nice breakout setup coming out of 12:00 ET, but the Dow was favoring the bears throughout the mid-day when it failed to break higher with the Nasdaq at noon. The S&Ps leaned towards the Dow's bias.

In the end, all three indices had their way. The Nasdaq broke higher while the Dow and S&Ps still based with slower upside. Then at 2:00 ET the FOMC Minutes were released. The result was a sharp move lower, which broke the Dow and S&Ps out of their range. They fell sharply into the morning lows and the 5 minute 200 simple moving averages. The S&Ps found support at the morning lows, but the Dow moved slightly under those morning lows before it hit its own 5 minute 200 sma. In his release, Federal Reserve Chairman Ben Bernanke told member of the Senate Banking Committee that the pangs felt from foreclosures and delinquencies will "likely get worse before they get better."



After the minutes were released the indices switched roles. The Dow and S&Ps climbed into the close, but while the Nasdaq did pull up somewhat, it stalled shortly after 15:00 ET and fell sharply into the bell. Even with the struggle for upside though, the market still has room on the 60 minutes charts to continue to press the highs. They do look to head slightly lower into the open though, so given the added chop this week, I'll be focusing mainly on the news plays intraday for setups on Friday.

Market Edges Highs, but Trading Remains Light

Good day! Although the holiday week is behind us and we are heading into earnings season, volume remained light on Monday. This continues a string of slower than average Mondays in the overall market which was primarily range-bound throughout the session. By the end of the day the Dow Jones Industrial Average ($DJI) had risen 38.29 points. It was the leader in the relative strength department, but still only gained 0.3%. The S&P 500 ($SPX) climbed a mere 1.41 points. The Nasdaq Composite ($COMPX) also had only a slight gain with 3.51 points. Both of these were only an increase of about 0.1%.

I have a presentation coming up this weekend in Denver sponsored by the CBOT, so a lot of my trading since I returned from vacation has been focused on the EMinis in order to use them for examples. While I've done well, a focus on individual stocks would have served me better, since a lot of individual stocks on Monday really outperformed the market as a whole.

Leading the Dow on its steady journey were some of the most recognized names in the market. Alcoa Inc. (AA), which is always one of the first to announce earnings and which was due out after the closing bell, led the way with an increase of 1.7% (+$0.70) on Monday. Incidentally, it later reported that while net income fell 3.9% last quarter, revenue rose 3.4%. This was somewhat short of expectations and AA did end up moving lower by about 1% in afterhours trading.

Boeing Co. (BA) also moved strongly higher in Monday's session on news, but while AA climbed throughout the day, BA's gains came in the form of a strong upside gap smack into price resistance at the year's highs. BA had hit $101.45 just over a month ago and it retested that zone with a high shortly after the open of $101.32. It had been moving higher over the course of the past two weeks after a nice two-wave pullback off those earlier yearly highs. On Sunday the company then announced that it had orders for 35 of its new 787 Dreamliner commercial jet that made its debut on Monday. The first deliveries are slated for 2008 with the 787 seating between 210-150 passengers. One of the highlights is that it is anticipated to use up to 20% less fuel per passenger than other planes of a similar size.

The other top Dow movers were American Express Co. (AXP) at +1.5%, Caterpillar Inc. (CAT) at +1.3%, Intel Corp. (INTC) at +1.1%, Exxon Mobil Corp. (XOM) at +1.1%, and General Motors (GM) with a gain of +0.8%.

Johnson & Johnson (JNJ), another Dow component, rose 0.9% on news of a share repurchase program. While not in the Dow, ConocoPhillips (COP) also made headlines intraday when it surged at 2:30 ET on news that it planned to buy back up to $15 billion of its shares through the end of 2008. One attraction of these buybacks is that since they reduce the number of shares outstanding in a stock, they will tend to give per-share earnings a nice boost. Buybacks in the S&P 500 hit a record monetary level in the first quarter of this year of $117.1 billion. This is a 17.5% increase as compared to the same period last year.

Even though Nasdaq as a whole did not make many waves on Monday, some of the largest gainers in the overall market were not in the Dow, nor the S&P 500, but rather the Nasdaq. Among the strongest intraday movers were Taser Intl. Inc. (TASR), Amazon (AMZN), Sandisk Corp. (SNDK), Crocs Inc. (CROX), First Solar Inc. (FSLR), Isis Pharmaceuticals Inc (ISIS), JA Solar Hldgs (JASO), and my favorite stock of the year... Schnitzer Stl. Inds. (SCHN). Each of these had at least a very strong morning, and the majority had a very nice trend day on Monday.



Despite some really great moves in equities, the overall market was not terribly exciting. A slight gap higher was followed by a couple of small pivots back and forth in the first hour of trading. The Dow and S&Ps had ran into the previous highs, which we had been watching for resistance, and the rally from the previous afternoon served to exhaust the buying even though the market made a second attempt at highs into the 10:15 ET reversal period intraday after a somewhat faster drop out of 9:45 ET. Volume was lighter on the second bout of intraday buying on the 5 minute time frame though, and shortly after 10:30 ET the downside momentum increased, leading to new intraday lows and about a 50% retracement of the previous day's range in the Nasdaq and S&P 500.



The price retracement and support, combined with the Dow's 15 minute 20 sma support and an increase in volume exhausted the sellers into 10:45 ET. I picked up the NQ (Nasdaq EMini) at 2003.25 at 10:46 ET for a pivot trade. The momentum was also slowing and rounding off at lows in the Dow at the same time. I choose to buy the NQ first because it showed the greatest exhaustion. I added the YM (Mini-Dow) soon thereafter at 10:55 ET. I had to hold through a very slight flush of a few points, but the rounding off continued and the 11:00 ET reversal period held the Dow as it completed its closure of its morning gap and soon the three major indices were all heading higher.

The late morning bounce began quickly enough, moving nicely into the 5 minute 20 sma, but after taking back about half the earlier losses they ran into trouble. The daily charts were still very extended and the morning decline was simply too strong to sustain decent upside momentum on Monday. While I continued to favor the bulls, trading became very sloppy in the indices and it was necessary to just hold on and trust my bias since there were very few "pattern" setups throughout the remainder of the day. The uptrend channel on the 5 minute broke lower for about 30 minutes at 2:00 ET, but soon reversed back to the upside and was retesting the morning highs by the 3:00 ET reversal period. The sloppy action then returned for the final hour of trading with the 15 minute 20 sma serving as support.



Although we don't really have any reversal pattern triggering at this point on the larger intraday and daily time frames, the upside momentum has me concerned because the types of declines we experienced mid-morning on Monday are very common with this type of buying. It simply does not take much for the bears to grab hold. I am not going to be very aggressive on the short side just yet though, and will likely treat those setups that I do come across intraday more as daytrades than swings. Exceptions would be setups such as Panera Bread (PNRA) on 6/6 and Genzyme Corp. (GENZ) on 7/6. These types of gaps tend to have continued selling and are nice for swings when you catch them early on.