Commodities Lose Ground as Larger Market Attempts to Recover

07/10/2008 12:00 am EST

Focus:

Toni Hansen

President and CEO, Trading From Main Street

Good day! Trade was choppy on Tuesday, but the market showed decent strength throughout most of the session. After falling sharply in overnight trade, the indices futures began to turn around in the early hours of the morning. Part of the recovery was attributed to words out of the Fed that it may extend the time frame for allowing brokerages to find assistance through the central bank's emergency funds. By the opening bell prices were off only slightly. The indices had been congesting at highs in premarket action and a second pullback off those highs on the 5 minute all-sessions charts created a buy setup which triggered into the open. This led to some immediate upside in the market which quickly returned the stronger Nasdaq Composite ($COMPX) to the previous day's highs and the price resistance thereof.

Given the momentum of the move back into the prior high, the market did not react quickly to the resistance level. It held, but it took a longer time correction before the market began to pull back in terms of price as well. Economic data out at 10:00 ET impacted prices in the short term with some rapid back and forth activity within the larger range.

The National Association of Realtors reported that pending-home sales fell 4.7% in May. This suggests that home prices are likely to still see some more deterioration before they can really begin to firm up. Since May 2007, this index is down 14%. The hardest hit locale remains the South (Whoo hoo! Grrr....) with a decline of 7.1%. Since summer months are typically the slowest down here, we should see numbers remain low throughout the next several months. In the Midwest sales dropped 6%, with losses of 2.9% in the Northeast and 1.3% in the West. The April pending home sales index was revised to show a gain of 7.1%, up from the previous estimate of a 6.3% increase.

Federal Reserve Chairman Ben Bernanke also announced on Tuesday that the U.S. central bank will be issuing new mortgage lending rules next week, emphasizing high-cost mortgage lending practices. Congress, meanwhile, is working towards the passage of housing legislation aimed at curbing the current mortgage crisis and preventing future collapses.

Dow Jones Industrial Average ($DJI)


The markets continued to retreat following the 10:00 ET data. Both the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) hit new lows intraday before reversing off lows with the 10:45 ET correction period. The Nasdaq found support at that time as well when it hit its 15 minute 20 simple period moving average. Over the course of the next 45 minutes the indices slowly made their way back to the upper end of the day's trading range, although they failed to show any greater momentum on the upside than seen on the downside.

A continuation moved in favor of the bulls formed over noon with a low at that correction period as the indices hit 5 minute 20 sma support. Volume was light on the pullback into this support level, which meant a bullish bias into the early afternoon. A number of top names were forming cup-with-handle formations on the 5 minute time frame, including Apple Inc. (AAPL). When the correction broke higher, however, volume remained light and the moved failed to offer any confirmation. Prices rolled over at the higher with a steep Avalanche to nearly create a double top on the 5 minute charts leading into another descent into 14:00 ET.

S&P 500 ($SPX)


The move lower into 14:00 ET created a second wave of selling on the day on the 15 minute time frame in the S&Ps and Dow. This form of correction is very typical leading into a larger upside continuation move. On the smaller time frames the indices did not offer much in terms of decent continuation patterns near the entry for the two-wave pullback buy setup. The channel break from the second move lower was perhaps the best chance one had, although the market did stall for about 15 minutes along the 5 minute 20 sma before the pace accelerated on the upside into the final 90 minutes of trade.

Once the afternoon rally got under way, earlier resistance levels had very little affect intraday. The market broke rather easily to new highs on the session. Although the pace of the buying slowed in the final 45 minutes of trade, the indices continued higher until they hit price resistance on the larger 30 minute time frame. The S&Ps were the weakest and held the highs from Monday morning, along with the 15 minute 200 sma. The Dow and Nasdaq, however, were able to retest the levels from last week's highs when the daily congestion first began. The Nasdaq led the way with the Dow close behind.

Nasdaq Composite ($COMPX)


All three of the indices closed at the level of the day's highs. The Dow gained 152.25 points, or 1.4% on Tuesday. Citigroup, Inc. (C) was among the strongest within the index, posting a gain of 6%. Along with financials, health care was another leading sector. Meanwhile, Alcoa Inc. (AA) was a top loser, dropping 3.2% ahead of earnings that came out after the close. The S&P 500 rose 21.39 points on Tuesday, or 1.7%, and closed at 1,273.7. Many of the commodity-related securities were down substantially in the morning on Tuesday. By the closing bell, however, the only one of the 10 industry sectors in the S&Ps to close lower was the energy sector. Crude oil futures dropped sharply to close lower by $5.33 a barrel at $136.04. Rounding off the indices was the Nasdaq Composite. It rose 51.12 points, or 2.3% on the day and closed at 2,294.42.

Favor continues to reside with the bulls as the week progresses. Tuesday's action confirmed the larger 60 minute buy setup. The next step is for the market to clear last week's highs. Once that is accomplished it should be fairly easy for them to hit the 20 day sma resistance and push into the congestion level from two weeks back, from just before the downside gap on June 26th. The gap closure would be a major resistance level on the daily time frame.


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