Market Recap for Wednesday, December 10, 2015
The action on Wednesday was crazy. The Dow Jones was higher by 200 points in the first hour of trading. At that same time, the NASDAQ was up less than 10 points, a complete reversal of what we saw on Tuesday when the NASDAQ outperformed both the Dow Jones and S&P 500 by a wide margin. One reason for the disparity on Wednesday was the combination of a falling dollar and strength in Dow Chemical (DOW) and Dupont (DD), two behemoth chemical companies in merger discussions. Materials (XLB) rose 3% on the session as the sector nearly broke out above reverse head & shoulder neckline resistance at 46.00 identified in my Tuesday article. The XLB had an intraday high of 46.06 before backing off and closing at 45.48.
Weakness was felt throughout technology as every industry group in the space was down and most were down 1% or more. Electronic office equipment ($DJUSOE) tumbled 2.61% and has now fallen nearly 10% since appearing to breakout a little more than a week ago. This industry group is featured today in the Sector/Industry Watch section below.
Pre-Market Action
We'll finally begin to see a few economic reports as we close out the week. Later this morning, jobless claims will hit the Street while tomorrow traders will focus on both retail sales and inflation at the producer level. Of course, next week we'll hear the latest from the Federal Reserve as traders brace for what is likely to be the first interest rate hike in the U.S. since 2006. Reaction to that announcement will provide us an indication of market prospects as we head into 2016.
I'm reporting very early today so things could change significantly by the time the market opens, but for now U.S. futures are higher. European markets began red across the board, though there's been some improvement with German shares (DAX) pushing into positive territory. I think it's important that we see strength in the DAX sooner rather than later as key price support is approaching:
The S&P 500 performance is highly correlated in positive fashion to the German DAX as reflected above. Clearly, we don't want to see the DAX breaking below short-term price support as that would only add further pressure to the S&P 500 during a period where we typically see weakness from a seasonal perspective. A rebound from the current level in the DAX would be a positive for U.S. equities.
Current Outlook
Looking at a NASDAQ hourly chart reveals the possibility of a drop to 4900 to again test gap support from late October. The hourly MACD has been below centerline resistance for a week now as we bounced slightly on Wednesday to ward off short-term oversold conditions. I'd focus on the falling 20 hour EMA as resistance and that's currently at 5067, while support is close to 4900. Granted, we've been mired in whipsaw action recently so anything goes within this 4900-5175 range, but given the historical bearishness over the next week or so, I'd expect to remain toward the lower end of the range for now. Here's the hourly chart:
You can see there's a fairly wide area between the green line (support) and the red line (resistance) so anything goes near-term without changing the longer-term chart. Failure to hold 4900, however, would open the door potentially to much more selling, especially if aggressive areas of the market underperform and volatility ($VIX) spikes above 20. The VIX finished at 19.61 so tension is rising. A close above 20 could certainly spook traders and create an impulsive bout of selling so please be aware of that. Bottom line: I still remain bullish as price action tells me to be, but there has been some deterioration in relative ratios (aggressive areas vs. defensive areas) so a price breakdown should be respected. One level to watch will be NASDAQ 4900.
Sector/Industry Watch
Technology has performed very well throughout all the mixed signals of the past few months as it's posted a solid 9.82% gain over the past three months to lead all sectors. It's been the second best performing group over the past year, trailing only consumer discretionary. But one area in technology that has not been strong is the electronic office equipment group ($DJUSOE). After threatening a breakout less than two weeks ago, it's in a significant downtrend once again, one that broke below bear wedge support on Wednesday. That's likely to lead to further losses in time. Check it out:
Historical Tendencies
The bulls are going to need a bridge to carry them past this current neutral/bearish period that runs from December 7 to December 15. Once beyond that, historical tendencies turn much more bullish, especially from December 21 to December 31. More on that upcoming bullish period in the days ahead.
Key Earnings Reports
(reports after today's close, estimate provided):
ADBE: .45
RH: .63
Key Economic Reports
Initial jobless claims to be released at 8:30am EST: 270,000 (estimate)
Happy trading!
Tom
