The market has been able to string together three solid days of upside since hitting lows on Tuesday morning. The session began on Thursday with a gap higher into the open. The index futures had been trading in a range throughout most of the overnight session, but broke sharply higher at 6:30 am ET following a buy pattern into 5:30 am ET. Even though they pulled back off highs around 7:30 ET, news on the housing front took the futures back to the premarket highs.

At 8:30 am ET the Commerce Department reported that overall construction starts rose 9.1% in June, boosted by a change in building permit rules for multifamily units in New York City. New construction of single-family homes, however, declined 5.3% to a 17-year low. Excluding the Northeast, which was the only area affected by the new construction code, housing starts as a whole dropped 4%.

In a separate report, the government announced that jobless benefits climbed 18,000 last week to 366,000. The four-week average fell 4,500 to 376,500. Continuing claims fell to 3.12 million last week, down 81,000. The four-week average rose 16,500 to 3.14 million, which is the highest level since February 2004. For the same period last year continuing claims came in at 2.56 million.

The early morning data was unexpected and the market was still able to rally on the news. A cup-with-handle pattern formed along the highs and led to a final push on the upside into the opening bell. This extended the rally from Wednesday's trend day and left the market exhausted in the short term after following through into the 9:45 ET correction period.

After the morning reversal, additional data from the economic front did not help the bulls and aided the market's pullback from highs. Manufacturing in the Philadelphia region weakened once again for the eight straight month according to the Federal Reserve Bank of Philadelphia. Economists had anticipated a slight improvement this month. The Philly Fed index rose from negative 17.1 in June to negative 16.3. Readings under zero imply that the firms participating in the survey reported declining business levels for the month. Three-fourths of them stated increased costs, while only a third raised their own prices to compensate for the difference.

Dow Jones Industrial Average ($DJI)


The Nasdaq Composite ($COMPX) had the most severe drop off morning highs. It had returned to its 5-minute 20-period simple moving average and gap closure zone by 10:00 ET. The data pushed it under that support, while the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) were able to hold the 5-minute 20 sma following 10:00. A level of congestion along the intraday lows developed into 10:30 ET. This created an Avalanche short setup on the 5-minute time frame which led to a second wave of downside into 11:15 ET.

When the market is in a strong uptrend, a two-wave pullback offers the perfect opportunity to position oneself in the direction of the trend. The 15-minute 20 period simple moving average on the S&Ps and Dow corresponded to an equal move and the approaching 11:15 ET correction period to assist with the continuation pattern. Even the weaker Nasdaq had support at this time, pulling back into Tuesday's highs for a strong price support level.

The market was able to pop quickly off these zones and continued to rally strongly for the next 30 minutes. This meant that the upside move was about twice as strong as the prior decline. The significance of the change of pace was that another two-wave correction on a smaller time frame began to develop. The overall pace of the pullback on this two-wave correction was more gradual than the first one, resulting in an inverse head and shoulders pattern on a 5-minute time frame. The buy setup triggered just before the 13:00 ET correction period, but waited until after it to gain momentum. The 15-minute 20 sma was again support on the S&Ps and Dow and the setup triggered coming directly off that support level.

S&P 500 ($SPX)


The strongest move of the session was the direct result of this 5-minute buy pattern. The indices easily hit equal move resistance. They did not stop there, however, and instead a small continuation pattern formed into 13:30 ET to push the market to new intraday highs. The pace began to shift at that point. The 20 day sma finally hit in the Dow and Nasdaq. This strong daily resistance level helped end the intraday rally. The Nasdaq also had resistance at that point at the morning's highs.

An initial reversal pattern triggered coming off the highs at 14:30 ET. A congestion formed in the Nasdaq along the 5-minute 20 sma. This created an Avalanche setup again on that time frame. Instead of the inverse "V" followed by the Avalanche such as the one from the morning, in this case it was an inverse cup-with-handle. This took the Nasdaq lower into 15:30 ET, although the market recovered slightly into the closing bell.

Nasdaq Composite ($COMPX)


Despite the turn around into the close, the market still posted strong gains on Thursday. The Dow Jones Industrial Average ($DJI) rose 207.38 points, or 1.9%, to close at 11,446.66. Out of the Dow's 30 index components, 24 posted gains. Financials led the rally with a 16.9% rally in Bank of America (BAC) fronting the Dow's gains. JPMorgan Chase (JPM) came in a close second with a 13.52% gain. General Motors (GM) was also one of the top leaders and posted an 11.93% gain. Citigroup (C) came in fourth with a 9.11% gain, while AIG (AIG) followed with a 7.04% gain. On the losing side, Coca-Cola (KO) fell 3.82% following earnings, while Alcoa (AA) dropped 2.99%.

The S&P 500 ($SPX) rose 14.96 points, or 1.2%, on Thursday. It closed at 1,261.12. Financials rose 6.9%, followed once again by consumer discretionary, which were up 3.6%. Energy was again on the downside, falling 3% on the day. Top S&P stocks included Huntington Bancshares Inc. (HBAC) (+40.25%), Mgic Invt Corp. (MTG) (+39.02%), Wachovia Corp. (WB) (+27.51%), Regions Financial (RF) (+22.22%), Barr Pharmaceuticals (BRL) (+22.11%), Freddie Mae (FRE) (+21.96%), and Fannie Mac (FNM) (+18.16%). eBay (EBAY) (-13.88%), Nucor (NUE) (-11.08%), and Safeway Inc. (SWY) (-10.76%) were the major losers.

The Nasdaq Composite ($COMPX) rose 27.45 points, or 1.2%, to closed at 2,312.3 on Thursday. A number of large tech names were slated to report earnings following the closing bell, which led to some of the greater weakness in the afternoon as profit-taking took place ahead of the data. Microsoft (MSFT) and Google (GOOG) both released earnings after the bell. Those that didn't protect ahead of the close are probably wishing they did! Earnings results from both companies were disappointing and came in under expectations. Merrill Lynch (MER) also reported after the close and also failed to meet expectations. Shares of all three companies were off more than 6% in after-hours trade. The index futures also fell on the news. The Nasdaq futures even broke through the morning lows.

A lot of the activity in the morning is going to be driven by the reactions to Thursday's afterhours earnings releases. Citigroup (C), Honeywell (HON) and Schlumberger (SLB) also report ahead of the open and will be in play for the day. The market is slated to gap substantially lower into the open. After two-three days of upside it is typical for the market to form a larger correction to that trend, so the gap is going to assist with that correction. As long as the indices can break the 15-minute high soon after it occurs, however, that gap will have an easy shot at closing. Once an extreme gap begins to close, then it will usually complete that closure before the morning is over.

On a daily time frame, given the current price development, what I am expecting from the indices is a pullback for several days, possibly even back into the zone from the week's lows. After that point I am looking at another bounce off support. A second bounce has the potential to last for about 8-10 days back into the mid-June price zone.

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.