We've been watching the markets for a short-term recovery over the last couple of weeks, but the indices had a difficult time getting off the ground. On Wednesday, however, that upside finally materialized to follow through on the rounded lows on the 60-minute charts. We didn't get another correction intraday like I had been watching for, but the market broke higher out of the range ahead of the opening bell and this created a very clean break in the daily downtrend channel from the last several weeks.

After gapping higher, the market continued to rally throughout the remainder of the day with a solid uptrend on decent volume. The upside follow through was so monumental in this recent market volatility that the Dow Jones Industrial Average ($DJI) actually managed to post its largest percentage gain of the year to date. This translated as a 331 point move, or 2.6%. The Dow closed at 13,289.5 with all 30 Dow components showing positive closing prices. Citigroup (C) gained 6.5%, while American International Group (AIG) rose 5.9%, and Bank of America (BAC) climbed 4.5%.

The S&P 500 ($SPX) rose by an even larger percentage than the Dow. By the closing bell it had gained 40.79 points, or 2.9%. It closed at 1,469.02. The Nasdaq Composite, however, usurped both by climbing 82.11 points, or 3.2%. It closed at 2,662.91. This was the second largest gain of the year in the Nasdaq, following the tech rally on November 13. Adding fuel to the fire in Wednesday's rally was the Federal Reserve's Beige Book, which highlighted slowing economic growth. This raised hopes that the Fed will go ahead with further rates cuts next month. At the same time, crude-oil futures continued to fall on Wednesday. January delivery dropped $3.8 to $90.62/barrel on the NYSE.



Following the gap, the market congested for about 15 minutes and then broke to new intraday highs. The continuation paused heading into the 10:00 am ET housing data, but displayed very little reaction overall to the news that sales of existing homes fell by 1.2% in October, while the supply of homes on the market hit 22-year highs. The market had also shrugged off the premarket durable goods data, which revealed that orders for U.S.-made durable goods had fallen yet again in October.



The most rapid move intraday on Wednesday took place out of the 10:15 ET reversal period. The market continued to move sharply higher until the 10:45 ET reversal period hit. The indices then fell into a nice consolidation over noon with a solid bullish bias thanks to moderate downside on declining volume and 5-minute 20 simple moving average support. Although the breakout was fairly solid, the pace was a great deal more lax than in the morning as the bulls continued to push into the afternoon. The 5-minute 20 sma zone held in the S&P 500 and Dow until the final 30 minutes of trading. The Nasdaq had established most of its gains in the morning, so it broke the 5-minute 20 sma when it pulled back out of the 14:00 ET reversal period, but it still held the earlier breakout level as support and made new highs out of the 15:00 ET reversal period before it also corrected more strongly just prior to the close.



I do not expect the market to be able to maintain this momentum on the upside for long, but I am still leaning for that retest of the previous highs zone. Should the S&Ps and Dow establish a very slightly higher high, then the door will be wide open for a much larger correction off highs into the early half of 2008.

Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.