Mergers and Acquisitions Help Equities Stay Afloat

Equity Futures: Dow +00.00. S&P +2.70. NASDAQ +5.00. Japan Nikkei -20.00. German Dax +3.00

U.S. Trade: The major U.S. indexes traded barely above the break-even line, aided by gains seen in the commodity markets and by the mergers and acquisitions announcements on Tuesday.

The global equity market saw negative momentum during the overnight session, especially around the European open, when the entire market was falling at a strong pace. However, S&P futures managed to bottom in the 1025.00 area, the same place where the market made an intra-day swing point low in Monday trade. To some extent, this shows that the 1025.00 level was protected by several large orders.

The market traded in a very chaotic fashion around the opening bell, with the S&P 500, Dow Jones and the NASDAQ indexes swinging between the break-even level and the -0.5% moves. Eventually, the three indexes managed to turn into the green following the news that Berkshire (BRK.A) will buy the railroad company Burlington Northern Santa Fe (BNI), a transaction that would cost up to $26 billion. The last time that Warren Buffett, the man behind Berkshire Hathaway, bought a company, it happened at the peak of the credit crisis, when it acquired a $5 billion stake in Goldman Sachs (GS).

S&P Technical View: TheLFB Member Charts

Daily chart trend: Long. Main price points: 1080-1100. Looking for: Wave 5 or C top

The price structure on the daily chart is showing two valid scenarios. On the left side of the chart below, it shows an impulse structure with five waves up from the 665 lows to the current highs. If this is the case, the wave 4 discussed on the weekly chart, below, will be rejected, since the fourth wave is a corrective wave, which means it cannot be sub-divided by a five wave move. However, in this scenario, a three wave push lower into a corrective blue wave 2, with a target somewhere around 950 area is expected.

On the right side of the chart, we have a different picture, with a wave count that with a zig-zag correction, which is valid for a wave 4 scenario. In this case lower blue wave 5 will follow.

Overall, the current price structure signals for a coming turning point with at least three wave push lower over the coming weeks, since the market is trading around the top of wave 5 or wave C leg.

Sector Moves: Basic materials and industrial goods had the biggest upward contribution to the equity market. Basic materials surged as gold reached a new all time high in Tuesday trade, while crude oil approached the $80.00 area. The industrial goods sector surged on the performance of Black & Decker (BDK), which is currently trading up by 25% after Stanley Works (SWK) announced that it would buy the company. Right now, Stanley Works is up 6%.

Negative momentum came from the technology sector in Tuesday trade, after Morgan Stanley down-gradeds. The semiconductor sector was the second worst industry in the S&P 500, falling 2.5%.

In the S&P 500, the biggest gains came from the Black & Decker and Buffett’s latest acquisition, Burlington Northern Santa Fe, which advanced 28%. The railroads index jumped 10% on Tuesday.

Economic Moves: The U.S. calendar was clear of any red-flag reports, but still a news release showed that U.S. factory orders increased for the fifth consecutive month in September.

Crude oil was recently trading at $79.30 per barrel, higher by $1.10.

Crude oil Technical View: TheLFB Member Charts

Daily chart trend: Long. Main price points: 68.00, and 82. Looking for: Wave V top

Oil has made the latest top around the 82.00 zone, very close to the Fibonacci resistance levels shown between 83 and 84. Volume has not been strong over the last ten days, and the MACD is showing bearish divergence. All these reads are characteristics of a wave V move, which is the final sub-wave of a black wave 1), and is indicative of a reversal set-up, in this case, short.

Gold was recently trading higher by $31.10 to $1085.10.

Disclosure: No positions