The index futures surged higher into the open on Friday following better-than-expected jobs data. Nonfarm payrolls in April fell by 20,000, substantially fewer than the average of 80k/month average year to date. Economists had been anticipating a job loss of 78,000. April's jobless rate dropped to 5%, off 5.1% in March, while it had been expected to inch higher to 5.2%. Average hourly earnings increased by 1 cent to a year-over-year gain of 3.4%, while the average workweek fell six minutes to 33.7 hours. The factory workweek fell 18 minutes to 40.9 hours.

The premarket rally created an opening price level in the indices which broke through the upper channel of the daily trend we have been following over the past two weeks. It is common that an upside gap out of a trend channel will create continuation of that channel break. In individual stocks I actually look for such a move to help me identify stocks that will have a higher probability of a trend day in the direction of the gap. When the overall market experiences a gap of this size, however, especially after a trend day such as the one which took place on Thursday, such a gap has a much more difficult time holding and the bias favors a closure of the gap.

The market opened on Friday at fairly decent price resistance, particularly in the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI). I often use the index futures to identify support and resistance levels. The EMini futures provide very accurate readings. Last November the June contract for the EMini S&P 500 (ES) hit a low of 1426.25. The premarket high on the ES was 1427, with an opening high of 1424. This landed it squarely in the zone of the support turned resistance from November. The mini-sized Dow (YM) experienced similar resistance from a weekly low made in August of 2007 at 13199. The premarket high on the YM was 13133. While this is not as close as it was on the ES, it was still in the zone of that resistance given the size of the time frame involved, although this also means there is more wiggle room on both sides of that resistance level.

This weekly resistance in the indices, combined with the bearish bias on this type of gap in the indices, helped the market start to sell off even before the opening bell rang. An Avalanche had been forming on the 5 minute charts in the premarket and triggered at the same time as the intraday session began, sending prices plummeting out of the open.

The market found initial support at the 9:45 ET correction period. At this time the Nasdaq Composite ($COMPX) had also fallen into the support zone from Thursday's highs. The two worked together and the market bounced into 10:00 ET. The momentum of the rally was strong, but not as strong as the descent had been and the congestion from the premarket base into the open served as strong resistance, allowing the market to once again begin to sell off as the morning progressed. The light volume on the bounce helped, since it signified a lack of truly committed bulls. Whenever the market rallies on light volume it is a warning sign and increases the risk that it can quickly reverse.

Dow Jones Industrial Average ($DJI)


At 10:00 ET the Commerce Department came out with its most recent statistics on U.S. factory orders. Excluding products related to transportation, orders for U.S. goods rose by 2.2% in March. This is the largest increase in a year. Durable goods orders increased 0.1%, coming in higher than anticipated. This data, combined with the earlier jobs data and recent decisions from the Fed, are fueling speculation that the economy may be beginning to stabilize. It didn't do much to help the market out intraday, however, since prices began to fall once again soon after the 10:00 ET data.

The market stalled briefly at morning lows and the 5 minute 20 period simple moving average, but instead of forming a continuation pattern such as an Avalanche, a three-bar continuation formed on the 5 minute time frame. The move was decent out of this pattern, taking the Nasdaq Composite back to its 15 minute 20 sma, but the overall momentum was not as strong as earlier. This is rather common with this type of continuation pattern and can lead to choppier market action.

The indices had begun to break lower again quickly, but that momentum lasted for only a couple of minutes out of 10:30 ET and it slowed as the indices made lows into the 11:00 ET correction period. The slower momentum allowed the indices to pop quickly, albeit briefly, out of 11:00 into the 5 minute 20 sma resistance, which hit at the 11:15 ET correction period. This resistance held and a 5 minute 2-wave continuation pattern was created, triggering into the 12:00 ET correction period.

S&P 500 ($SPX)


The 15 minute time frame made it difficult for the market to gain momentum on the downside on Friday despite the larger bias in that direction. Overall the upside from Thursday into Friday was simply too strong. Sharp upside moves will most often correct through a more gradual pullback. Downside momentum has a difficult time increasing unless the market forms a more gradual upside following the initial correction off highs. On Friday, however, the midday congestion simply did not form long enough to create a larger short setup. Instead it kept breaking down on the 5 minute time frame, making a series of lower lows on the 5 and 15 minute time frame which was a steady trend, but with a slower trend channel than the prior upside move.

At 13:00 ET the market flushed quickly lower. This took the indices into the middle of the congestion level from Thursday. The middle of a previous congestion zone is very strong support and it held well. The market began to increase in upside momentum, hitting prior 5 minute highs and breaking the 5 minute 20 sma just prior to 14:00 ET. It then flushed lower at 14:00 ET, but this simply created a better test of the support and it fell into congestion along those lows. Since the momentum on the downside was slower than the upside and there were slightly lower lows in the S&Ps and Dow on the 5 minute time frame with strong 15 minute support, it made it more likely that the lows would hold for the remainder of the day.

The pattern along the lows from 13:00 to 15:00 ET is actually one, which, had the momentum lower into 13:00 been more substantial, would typically be a short setup. Given the pace and trend placement, however, the risk was high that a short trigger into 15:00 ET would fail. I had been asked about this very pattern intraday and in fact, the setup did trigger a false short with a slight break of the trend channel from 14:05 into 15:00 ET, but the 5 minute chart shows how the indices failed to follow though and flushed quickly higher instead. The market remained choppy into the close, but the bias had turned and the indices closed at afternoon highs, albeit still far from morning highs.

Nasdaq Composite ($COMPX)


By the closing bell the Dow was up 48.20 points, or 0.4%. It ended the session at 13,058.20, up 1.3% on the week. The S&P 500 gained 4.56 points on Friday, or 0.2%. It closed at 1,413.9, rising 1.1% on the week as a whole. Energy and financials stood out as the top market leaders in the S&P, while healthcare remained negative. The Nasdaq Composite closed lower by 3.72 points on Friday, ending down 0.1% at 2,476.99. On the week, however, it gained 2.2%, topping both the S&Ps and Dow.

The failed breakout from the daily channel is going to help the market continue to try to hold the larger channel as the new week begins. There will be room for the indices to move higher on Monday morning, continuing the reversal off Friday's lows. By afternoon, however, the way will have been paved to allow for another breakdown on the 60 minute charts with the strong potential for an Avalanche on that time frame. The larger bias is more difficult to discern since there will be room following another 60 minute correction for the market to again push higher. A lot will depend upon the momentum moves of the next several swings on that 60 minute time frame, although I do think the market will attempt a stronger test of the year's highs this coming week.

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.