The market extended Thursday's losses early on in Friday's trade. Although the day began with a modest upside gap following some afterhours recovery off the prior day's lows, the gap landed the major index futures contracts, including the S&P 500, Dow Jones Ind. Average, and Nasdaq, right at their 15-minute 20 period simple moving average resistance levels. This was also price resistance from early afternoon congestion on Thursday and it was enough for the market to decide that it just was not quite ready to do more, thanks in large part to the more substantial bearish daily action that had been trying to shape up.

After pulling slightly lower to close the tiny gap in the first 15 minutes of the regular session, the market congested along the 5-minute 20 sma support before breaking lower once again at 10:00 am ET. The steady selling which followed took the market into new lows on the week. Although the momentum slowed into 10:45 ET and the market attempted to correct off lows, there was not enough volume to trigger exhaustion on the downside. Due to the average volume on the selling the market would have to at least round off at the lows to turn back around and move higher at a stronger pace.

Without the exhaustive volume or the rounded lows, the market was able to hold the 5-minute 20 sma resistance around 11:30 ET and moved lower with a 15-minute bear flag. Notice the lighter volume even as the market moved higher into that 5-minute 20 sma. This indicated a lack of motivated buyers and helped keep the door open for further downside. Although the selling resumed into 11:45 ET, it picked up with the 12:00 ET correction period on a small Avalanche continuation pattern. The strongest drop lasted about 15 minutes, but the market was able to roll over a bit into 12:30 in the Nasdaq.

Another attempt at a correction off lows began at 12:30 ET. The 5-minute 20 sma once again served as resistance. The market congested along this resistance level as volume remained light. A second wave of buying on the 5-minute time frame barely broke the market past the 5-minute 20 sma resistance, but this feat, along with the shorter downside move in terms of price on the second 15-minute drop began to show signs of rounding off on the larger 15-minute time frame.

Since the second drop on the 15-minute time frame was to a lesser degree than the first, the odds were strong that a third attempt at lower lows would be even less substantial than the second. The market attempted this third move into 13:0 ET, but previous lows held in both the Dow and S&Ps. After two attempts to break, with a lower low of only a few ticks in the Nasdaq, I began to buy, anticipating a much larger break of the 5- and 15-minute 20 period simple moving averages.

One final test of lows took place just prior to the final reversal period of the day. At this point, that afternoon reversal attempt received a huge boost thanks to news from the financial sector. Even though a correction off the lows was already probable into the close, it would have been highly unlikely to get the type of momentum we saw in that final 30 minutes of trading had it not been for reports coming out at that time that several large banks were looking to bail out Ambac Financial (ABK), a flailing bond insurer, resulting in a 16% gain for shareholders. American Intl Group, Inc. (AIG), which had already been forming a momentum reversal pattern on the 15-minute time frame, was grateful for the added impetus to break higher and closed with a gain of 2.7%.

While the rising tide of the market didn't quite raise all ships, it came rather close. Even many of the top losers up until that point in the day managed to recover somewhat in the final 30 minutes of trading. The Dow, which had been down by about 120 points mid-day, managed to close higher by nearly 100 points with a 96.72 point gain, or 0.8%. It ended the day at 12,381, up 0.3% on the week despite making new lows on the week just a short time earlier. Within the index itself, only INTC, MSFT, GM, GE, and MRK closed in negative territory. The S&P 500 rose 10.58 points, or 0.8%, on Friday. It closed at 1,353, gaining 0.2% on the week. The Nasdaq Composite had the smallest percentage gain, weighing in at +0.2%, or 3.57 points. It closed at 2,303, down on the week by 0.8%.

Due to the late day rally, the market failed to confirm the daily weakness. Instead, the larger range along the 20-day sma held. Since volume has been light throughout this congestion, as soon as it does break, we should expect a multi-day trend. Currently the bias has shifted slightly in favor of an upside resolution to the range, but I don't expect the rally to continue far into the morning on Monday without correcting, and I'm not going to commit whole-heartedly to an upside breakout just yet. It would actually be rather difficult given the 60-minute chart action to really continue this type of buying and would not require much of a shift for the bears to regain control. Any immediate continuation of the upside would be more likely to be rather subdued at this point, barring additional news-based catalysts, with12,800 serving as strong resistance in the Dow.







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.