Thursday began on a rather sour note, gapping sharply lower on the continued downside we had been seeing afterhours the night before. This gap led to an open right at those price levels from Tuesday morning, which I had pegged as the next major support. The S&P 500 and Dow Jones Ind. Ave., however, opened at the lower end of the opening range, whereas the Nasdaq opened in the upper end of it. Continued weakness out of the gate led to the S&Ps and Dow eventually making it back into Tuesday's lows and a little beyond in the S&Ps. The Nasdaq Composite held up more readily and maintained a price level still within the Tuesday morning congestion.

Part of the morning tumble was attributed to news from Carlyle Capital (CARYF), which is a bond fund, that stated that it was unable to meet the margin calls on its portfolio of securities backed by residential mortgages. The fund fell 97.6% on Thursday. Other companies facing the same pain include Bear Stearns (BSC) (-7.4%), Citigroup (C) (-0.7%), UBS (UBS) (-0.9%), and Deutsche Bank (DB) (+0.1%). To top this, Treasury Secretary Paulson also called for banks to reconsider their dividends in an effort to curb the outward flow of capital.

Economic data also influenced the morning's activity. The Commerce Department reported early Thursday morning that consumer spending weakened once again in February. U.S. retail sales were down 0.6%, lower than the no-change status that most had been anticipating. First-time claims for unemployment benefits had little impact. The data came in as the same as which had been revised for the week before: 353,000.

After the initial reaction to the open wore off, the market was able to pick itself up extremely well. A strong 800 tick buy setup had formed in the S&P EMinis going into the 10:45 ET reversal period and it triggered sharply into 11:00 am ET. The setup received a very welcome boost from a report by Standard & Poor which fueled speculation that banks may be close to seeing an end in sight in terms of the current subprime meltdown.

The Dow had been down by 235 points in morning trade, but the S&P 500, Dow Jones Ind. Ave., and Nasdaq Composite all closed the zones of their morning gaps into noon. A nice mid-day correction began coming out of that reversal period, but it lacked any real bearish bias intraday, hugging the 15-minute 20 sma on light volume. This kept me in a bullish frame of mind into the afternoon.

The breakout to new intraday highs happened rather quickly. It began after a short two-wave correction over lunch and took off into 13:00 ET. The indices hit equal move resistance into 14:00 ET, as well as price resistance from the prior session. The momentum shifted at these highs, but not enough to lead to any sharp reversal in the final two hours of trading. The indices hugged the 5-minute 20 sma support throughout most of the final hour, leading for a bearish bias on that time frame into the close, but there was not enough time to see any strong follow-through on the setup until afterhours, when the market dropped sharply back into the 13:00 ET support levels.

Although they moved quite a bit lower after the bell, the Dow closed with a gain of 35.42 points, at 12,145, while the S&Ps gained 6.71 points to end the regular session at 1,315, and the Nasdaq Composite added 19.74 points, closing at 2,263. I am favoring a range on the 60-minute time frame heading into the weekend.

Note: the charts below are created using March futures contracts to show the best comparative data, however, the current month to use is June. The June futures symbol is M.

Dow Jones Industrial Average ($DJI)


S&P 500 ($SPX)


Nasdaq Composite ($COMPX)


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.