(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.)
THURSDAY’S MARKET WRAP-UP
Market Snapshot for October 26, 2011 (6:30 a.m. ET):
Closing Prices: DOW 12,208.55 (+339.51, +2.9%), S&P 500 1,284.59 (+42.59, +3.3%), NASDAQ 2,738.63 (+87.96, +3.4%), Nikkei 225 9,050.47 (+123.93, +1.39), DAX 6,332.04 (-5.80, -0.09%), FTSE 5,698.90 (-14.92, -0.26%) OIL 92.41, GOLD 1,738.40, SILVER 35.42 EURO 1.4145, YEN 75.85, BRITISH POUND 1.6096, U.S. DOLLAR INDEX 75.23
EU Plan Pushes Euro to Multi-Week Highs
The EU has taken center stage this week as the region’s leaders met to hash out plans to attempt to stabilize and improve financial conditions. The market was disappointed on Wednesday morning that an anticipated announcement had been delayed, but recovered into Wednesday afternoon. A deal was finally announced on Thursday that included increases in the EFSF (bailout) fund and agreements to cut Greece’s debt obligations by 50%.
The index futures rallied strongly throughout premarket trade, leaving them exhausted ahead of Thursday’s opening bell, but the bulls held their ground throughout the morning. The market corrected from the move by falling into a trading range throughout most of the morning with only a minor correction in price to 5 minute 20 period moving averages before moving higher once again in afternoon trade. The euro also benefited greatly from the news and experienced one of its best single-session moves of the year with a gain of 2.3% by the close.
Dow Jones Industrial Average (Figure 1)
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Thursday’s Economic Reports
Thursday morning’s GDP report showed a growth of 2.5% annually for the third quarter, according to the Commerce Department’s first quarterly estimate. This was greater than the 2.3% anticipated growth rate. The rate stood at 1.3% in the last quarter.
Jobless claims last week fell 2,000 to 402,000, which was slightly less than the 400,000 anticipated, but relatively unchanged from the previous week.
Pending home sales were disappointing, but had little impact upon the day’s price action. Sales fell unexpectedly by 4.6% in September after a 1.2% decline in the previous month. Economists had expected sales to remain approximately the same.
On the docket for Friday are September’s personal income and spending data, the employment cost index for Q3, and October’s consumer confidence.
S&P 500 (Figure 2)
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Index Wrap-up
The Dow Jones Industrial Average ($DJI) ended the day on Thursday with a gain of 339.51 points, or 2.9%, and closed at 12,208.55.This was the first time the Dow has been above 12,000 since August 1. All of the Dow’s thirty index components posted a gain. Bank of America (BAC) was the strongest percentage performer with a gain of 9.6%.
The S&P 500 ($SPX) finished the session with a gain of 42.59 points, or 3.3%, and closed at 1,284.59. The strongest of the index’s industry groups were the financials (+6.2%), materials (+5.3%), industrials (+4.4%), and energy (+3.9%). Morgan Stanley (MS) was up 17%, while Citigroup (C), Goldman Sachs (GS), Bank of America (BAC), and JP Morgan (JPM) all climbed more than 8%. There were no declining groups, but the weakest was consumer staples (+1.3%).
The Nasdaq Composite ($COMPX) ended the session higher by 87.96 points, or 3.4%, on Thursday and it closed at 2,738.63.
Nasdaq Composite (Figure 3)
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OUTLOOK
Thursday’s session ended off highs after pulling back on a momentum reversal on the five minute time frame in the final thirty minutes of trade. This is a common correction period following strong trend action. Thursday’s afternoon rally was the third push higher after reversing off Wednesday’s mid-day lows on the 15 minute time frame whereby the 15 minute 20-period moving average served as support between each wave of buying. This left the larger trend exhausted once again nearing Thursday’s close and the market has continued to correct off those highs into premarket trade early Friday morning. On the weekly time frame the indices are also at a zone of strong price resistance from this summer.
Premarket action is suggestive of further selling, but the momentum thus far is gradual and positive data could once again lead to more upside. It will be important to watch the 5 minute time frame heading into the open and early in the session, because a single shift in momentum on this time frame can lead to a rapid move intraday. Slower upside will likely foster a larger price correction on the downside, while rounded lows with slower downside can pull the market up once again into the weekend.
