After just posting one of the best days in the market in years, the bulls were yanked back to reality in Thursday's session with the second worst close in the Dow thus far this year. The session reminded me a bit of the school-yard bully in elementary school. He was the kid who was really mean and would tease another kid mercilessly, but then when a new kid came around he could taunt he would be really nice and jovial to his prior victims. When his new obsession wore out, however, he was soon back to picking on his old favorites. Well, after being held back for most of the year, this bully has decided that it's his day to shine. He took a back seat after the market hit support a few weeks ago as he considered his next move. He concluded that he would play with the bulls for a bit on Thursday before he proceeded to shove them into the mud puddle...

The day began on a sour note for the bulls with an extreme downside gap. The futures had been selling off steadily since the wee hours of the morning, but they did manage to open smack into support intraday at the 15 minute 200 simple moving averages and price support from the last couple of days. Most extreme gaps attempt to fill and this meant a bullish bias out of the open when the bulls thought for a minute that the market bullies had moved on. As soon as the gap closed in the Nasdaq Composite, however, the bulls were grabbed by the collar and yanked back off their highs.



A bit of a scuffle ensued in the latter half of the morning. The market tried to pull back up out of 11:00 ET, but was unable to break through the earlier highs. That price resistance and the more gradual climb gave way to selling again around 11:15 ET. The Nasdaq Composite was the hardest hit of the three major indices and pulled back to well under the 10:45-11:00 lows before finding support at noon with the 12:00 ET correction period and the 5 minute 200 sma. The S&P 500 and Dow Jones Ind. Average also came into the 5 minute 200 sma at the same time, but they had almost no room to move before they hit, so the impact was lessened.

The market then continued to roll over into the early afternoon. The indices fell nearly flat coming out of 12:00 ET and volume dropped as they managed two waves of upside into 12:30 on a 2 minute time frame. These moves were barely discernible on a 5 minute chart before the 5 minute 20 sma hit, along with another wave of selling. This move was a bit stronger than the last and took the market all the way back to the opening lows. These corresponded to the 15 minute 200 sma. Volume increased and the Nasdaq rounded off slightly to trigger a scalp buy setup shortly after 13:00 ET. The index had three waves of selling into major intraday support and slowing momentum, both of which was rather bullish on at least a short-term time frame. The 5 and 15 minute 20 sma overhead served as resistance for the correction off these lows and acted as the "guaranteed" target for the pivot higher. While a longer correction off the support was possible, getting any more substantial gains past the 5 minute 20 sma was more "iffy" due to the proximity of the 15 minute 20 sma and the underlying market weakness.



When the 15 minute 20 did hit, the 14:00 ET correction period was right there to catch it and the selling resumed. The remainder of the day was a lot more difficult than earlier in the session. I actually took off at about 14:30 ET to hang out with a friend who is visiting from out of town, but I don't think I would have done much in the futures market due to the greater degree of overlap on the 5 and 15 minute time frame that would have made it more difficult to see a lower risk continuation pattern after the 14:00 ET pivot. The main thing that did hold steady was the 5 minute 20 sma resistance. All three indices were unable to penetrate this resistance zone throughout the remainder of the day and the market closed right at the zone of the intraday lows. If you take a look at the daily charts, this was also the moving average support zones that had stalled the Dow and the S&P 500 in recent weeks.

By the closing bell the Dow Jones Ind. Ave. ($DJI) had lost nearly 400 points (actual loss was 387.18, 2.8%). Citigroup Inc. (C) and JP Morgan Chase Co. (JPM) were among the hardest hit. They each lost more than 5% in Thursday's session alone thanks to news of continued worries over credit. The S&P 500 ($SPX), in which the financials carry even more weight, fell 44.40 points, or 3%. Within this index, Walmart (WMT) fell 4.1% after it posted earnings. The Nasdaq Composite ($COMPX) suffered the smallest decline in percentage terms. It lost 56.49 points, which translates as 2.2%.



I'm not very optimistic on Friday. This week has been a great deal better for trading than I had anticipated. I was pleasantly surprised by the number of high quality setups I found, not only in individual stocks moving on momentum unrelated to the overall market, but in the indices themselves. Sure, there were some huge chunks of time where volatility was simply too high to justify the risk, but overall it was a pretty nice week.

I am still concerned about the daily time frame, however, when it comes to follow through. I had expected the market to hold up a bit better on Thursday before it gave way to selling again, but now the door is open for another test of the month's lows. It is even going to be easier for the market to try to break to new lows on the month within the next week. That would not necessarily be the best scenario for the bears, however, because the market really has not corrected enough off the current lows to as easily sustain another mammoth daily selloff quite yet under normal circumstances. For that to happen, ideally the market would continue to chop around for at least one more week, if not two, and do so on declining volume before breaking down.

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.