After another strong day of selling on Wednesday, the market paused to catch its breath. The indices were left extended on the downside into Thursday morning after hitting the equal move support zone with Wednesday's descent as compared to that which took place earlier in the week on the 30-minute time frame. Since the market had begun to round off at lows into the close it left open the possibility that the indices may try one more push to lows before correcting longer off support. Some early morning jobs data, however, helped hold up the market early on.

Ahead of the open on Thursday the Labor Department released its latest data on first-time claims for state unemployment benefits. These had fallen last week by 9,000 to 365,000 on a seasonally adjusted basis. This was the lowest they had been since the first week of April. The dollar moved higher following the news, while oil backed off its record highs in the $135/barrel zone.

Dow Jones Industrial Average ($DJI)


After opening slightly higher, the market began to pull back and closed the gap within the first 15-20 minutes of the day. This took the indices into the first correction period of the day and the gap zone held as support. The market was able to pull higher in short bursts over the next 45 minutes before hitting larger time frame resistance at the 15-minute 20-period simple moving average. This resistance had me again favoring another reversal into noon, but the move had a difficult time with follow through. This was most likely due to that larger 30-minute equal move that had already hit and was serving as support.

The market hit initial support on the pull lower at the 5-minute 20 sma. At this point the indices began to hug that support level while volume dropped off. The formation was a 5-minute Avalanche pattern which triggered coming out of the 11:15 ET correction period. This followed through nicely into 11:45 ET. Equal move support on a 5-minute time frame hit in the Nasdaq Composite at that time. The S&Ps 500 ($SPX) and Dow Jones Industrial Average ($DJI) fell a bit further than an equal move with both hitting morning lows before they stalled.

S&P 500 ($SPX)


Over noon the market again turned higher. The overall momentum was slightly less than the downside, but it was still strong. The indices made their way higher into mid-afternoon. The congestion from the previous Avalanche served as initial resistance, but a pullback into the 5-minute 20 sma on light volume was able to take the indices back into the zone of the morning highs. This was a slightly higher high on the 5-minute Nasdaq, creating a 2T reversal pattern by causing a trap just over the previous high.

The market turned sharply lower into the 14:00 ET correction period. Compared to the congestion Tuesday afternoon and into Wednesday, however, the congestion throughout Thursday's trade was not quite long enough to allow the market to trigger a third wave of selling. The market bounced back off the lower end of the day's trading channel and continued to bounced around into the close.

Nasdaq Composite ($COMPX)


The Dow closed higher by 24.43 points, or 0.2%, at 12,625. 19 of its 30 components posted gains. The S&P 500 rose 3.64 points, or 0.3%, and closed at 1,394. The Nasdaq Composite gained 16.31 points, or 0.7%, and closed at 2,464. Consumer staples, health care, technology and health care led the gainers, while energy, materials and industrials were largely negative.

Trend moves are notorious for forming in waves of two or three. We already have two strong downside moves on a 30-minute time frame. Corrective moves are more often two waves, while primary trend moves tend to come in threes. Since the trend up until now has been on the upside, we may not see a substantial third wave until after the market corrects off support and rolls over. This can happen with an Avalanche pattern on the daily time frame, a 2T on the daily or even a descending triangle.

Which setup will be favored will depend upon how the market reacts to the daily support. If the indices round off at lows with a lower low then a 2T or triangle is more likely, where if the lows on Thursday hold we can more easily see an Avalanche form. Should the trend continued with a strong third wave of selling then the 20-day sma is going to be a major resistance level. In any case, I am again favoring a larger weekly pullback off the recent highs over the next several weeks.

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.