After giving up nearly all of its gain in the final two hours of trade yesterday, the indices were left quite extended on the downside on the 15-minute time frame heading into Thursday morning. We have experienced a number of these sharp selloffs recently with some more substantial than others. The sharp downside of April 28 into the 29 and a variation of the same type of pattern earlier this week from Monday afternoon into Tuesday morning bear the greatest resemblance to the turnaround off Wednesday's highs and the bias it created into Thursday.

In both cases a sharp downside move after the market rounded off at highs was followed by a very gradual correction off lows into the next morning. The move begins very choppy and with a great deal of hesitation, but manages to recover strongly after a bit of congestion along the 15-minute 20-period simple moving average. The overall momentum on that recovery, however, is a great deal weaker than the initial selloff itself.

Dow Jones Industrial Average ($DJI)


The entire rally on Thursday was quite choppy. The market crept higher into the 5-minute 20-period simple moving average where it stalled before continuing into 11:00 ET. At this point the indices were testing their 15-minute 20-period simple moving average resistance levels. The reaction off this resistance was modest. If the market was going to take a stab at holding highs, this was the time to do so. The indices began to form a 5-minute Avalanche by hugging the 5-minute 20 sma support around 11:15 ET. It did not do so long enough, however, to allow for the market to pick up on the downside. It broke after only 20 minutes, which simply dropped the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI) into 5-minute 200 sma support. This support held perfectly into 12:00 ET.

Out of all the indices on Thursday, the Russell 2000 was the most steady in its performance, experiencing the least amount of overall chop and the cleanest setups. Although I don't follow it a great deal myself on most days, it really stood out this time around. For that reason I've included it in today's column.

RUSSELL 2000 ($RUT)


Following the late morning break to highs, the market's momentum began to round off into 12:30-13:00 ET after the market began to test Wednesday's late morning congestion zones. By this point, however, the market had also confirmed the larger market pattern I mentioned at the beginning of this column and that created very high odds for a trend higher and at least back to Wednesday's highs into the close. Typically when I see momentum slowing on the upside I will begin to watch for reversal patterns. While I had one short setup in stocks into the afternoon, I stayed away from trying to short overall, particularly in the indices.

S&P 500 ($SPX)


Even with a bullish bias for the remainder of the day, the trick was finding decent triggers, or else just having the guts to buy and hold and trust the larger time frame pattern. The Russell 2K again offered the most solid late day opportunity, although the other indices did show triggers if you dropped down to the smaller tick charts. In the Russell 2K, however, a nearly textbook bull flag formed along highs from just after 12:30 ET into 14:00 ET. The 5-minute 20 sma held as support and the index broke well to new highs. It did hold first resistance strongly though and had to use the 5-minute 20 sma for support as the move continued. Nevertheless, the pullbacks were steady and the support held perfectly with one final push to highs in the last 30 minutes of the day. The other indices also continued to move higher after 14:00 ET, but they held the early afternoon highs rather well and only broke higher with 15:30 ET.

Nasdaq Composite ($COMPX)


Despite its cleaner trend action, the Russell 2K was the weakest of the four indices. It did not manage to break Wednesday's highs like the three others did, but it still reclaimed nearly all of the losses from those previous highs. It ended the session higher by 7.31 points, or 0.99%, and closed at 743.38. The S&P 500 broke the prior highs by the largest percentage and closed higher by 14.91 points, or 1.06% on Thursday and closed at 1,423.57. The Nasdaq Composite gained 37.03 points, or 1.48%, and closed at 2,533.73. The Dow Jones Ind. Average rallied 94.38 points, or 0.73%. It closed at 12,993.66, right into the zone of 13,000 price resistance once again.

This type of action on the 15-minute time frames will often follow through into the next morning, but then has high odds once again for another correction into the afternoon. This is also the third wave of buying on the 15-60 minute time frames, so the trend in play since the lows of the 9th is also now extended. It had two comparable time corrections - one on Tuesday and the second of Wednesday's highs - so a third correction should be longer at least in terms of how long it takes to correct compared to the prior two pullbacks once it gets going.

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.