The market followed through well on Friday with expectations favoring a trading range. The indices did continue the prior day's gains initially into the morning, but back and forth action left them unable to break the early morning highs.

The indices had gapped higher initially to kick off the trading day following premarket data. An hour ahead of the open the Labor Department released the January nonfarm payroll data. Employers cut back on hiring last month for the first time since August 2003 with an estimated loss of 17,000. Economists had been anticipating an approximate increase of 85,000 jobs, so the loss came as quite a surprise. Manufacturing, factory, construction and financial-sector employment all suffered the greatest, while the health care sector added positions. At the same time, the nation's unemployment rate fell, but it hit estimates at 4.9%, down from 5%. In related news, the average hourly wage for January increased 4 cents (+0.2%) to $17.75.



Following the open, the market stalled into the 9:45 ET correction period, at which point it shot higher, holding the trend channel from Thursday to break to new highs. A third wave on the 2-minute time frame followed around 10:00 am ET. At that point the Michigan Sentiment data, December's construction spending, and January's ISM Manufacturing Business Index all came out. Consumer sentiment dropped in late January, with Michigan's index falling to 78.4 from 80.5 in mid-month, but it was still higher than the previous month. Meanwhile, U.S. construction spending fell 1.1% in December. Lastly, the ISM Index rose to 50.7% last month from 48.4%. While a reading over 50% indicates expansion, the index is expected to slide again, however, before it finds support.

Although the initial response to the 10:00 data was positive, the afterglow did not last. By the time the 10:15 ET correction period hit, the market was already turning over. The three waves of buying on the 2-minute charts exhausted that trend and once the selling hit, it hit hard. Within about 30 minutes of trading, the Nasdaq had broken morning lows and was coming into Thursday's mid-day highs, while at the same time the S&P 500 and Dow Jones Ind. Ave. managed to close their morning gap zones and coming into 15-minute 20 simple moving average support. All of these support levels hit at the same time as the 10:45 ET correction period, giving the market strong support into the second half of the morning and into mid-day trading.



The strong momentum of the morning's descent made it difficult for the market to move strongly to the upside, but the indices still managed to retrace a large part of the move. The Dow and S&Ps both took back about half their losses, while the Nasdaq moved into the 38% fibonacci level into noon. This is another major correction period and when it hit the momentum continued to slow, this time on the downside. The market fell back into the same support at the 15-min 20 sma in the Dow and S&Ps, slipping into the 13:00 ET correction period on light volume.



The light volume indicated a lack of conviction on the selling and left the bias on the bullish side as the afternoon continued. It wasn't a strong bias though, and the larger trend extension from Thursday and into the morning kept the late day rally from picking up too quickly. It was still enough though to eventually bring the indices back up to close near the day's highs. This amounted to a 92.83 point (0.7%) gain in the Dow, a 16.87 point (1.2%) gain in the S&P 500, and a 23.50 point (1%) gain in the Nasdaq Composite. For the week as a whole, the Dow rose 4.4%, the S&Ps rose 4.9%, and the Nasdaq gained 3.7%.

Economic data for this coming week is rather light, but a number of speeches from the Fed and a continuation of this last quarter's earnings will continue to provide news to fuel the market. The indices have started hitting the earlier January price congestion and resistance levels, and better tests of this zone are expected this week. One thing I found interesting this weekend while scanning was that while a lot of the big caps and mid-caps are still looking rough, a number of small cap stocks have really started to show strength and have begun to turn back around with favor for continued upside on the weekly and monthly time frames.

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.