Market volatility has been a huge concern for traders and investors alike these past several weeks and it increased even more on Friday. A number of central banks from around the globe began increasing liquidity on Thursday by injecting billions of dollars worth of funds into the banking systems to attempt to offset some of the effect of the subprime-credit fiasco. This was stepped up on Friday, but the lasting impact of such a move has yet to be seen. In an effort to curtail further excesses in borrowing, the European Central Bank, which has provided the largest infusion of funds, appears to be set on raising interest rates in September.

The market was off to a wicked start on Friday and many credit the central banks for assisting in the mid-day reversal which began around 10:15 ET. I don't know that I really buy into the view that the banks are responsible for the recovery the markets experienced coming off the intraday lows. Selling exhaustion and momentum in and of itself stands as a purely technical reason as well and the mid-day bounce was not something that was unique to Friday's session. The market had been in an extreme decline beginning mid-morning on Thursday. The momentum from this selloff began to build again into the closing bell and followed through into the open where support from previous lows in the Dow and the 100 day simple moving average in the Nasdaq Composite held.

The morning gap on Friday was the second extreme gap to the downside in a row. The first time such a gap occurs, it nearly always fills in at least one of the three major indices. The second day is less certain, but still has a decent shot of again closing the gap in at least one of the three indices. If the markets were to experience a third gap lower of a similar magnitude, however, its preference would be to hold the gap and not attempt to fill.



On Friday, the market began the session by playing with the bulls. Even though it opened into support, a strong momentum move in the market as a whole typically needs some slower selling following the larger momentum move before it is able to adequately correct from the selloff. When the market was unable to sustain any stronger-than-average upside out of 9:45 ET, it opened the door to further morning downside. In this case the support levels gave way coming out of 10:15 ET and led to new lows in the Dow, S&P 500, and Nasdaq Composite. The S&P 500 experienced the least weakness, barely breaking the previous lows and instead creating a 2B reversal pattern, whereas the Nasdaq had the strongest break of support due to how it had based sideways while the Dow and S&Ps had crept somewhat higher out of 9:45 ET.

When the 10:45 ET reversal period hit in the market, the trend channel from the last leg of selling gave way to increasing momentum on the upside. Within less than half an hour the indices were back at mid-day highs and the pace of the buying began to accelerate. The resistance from the price levels of the morning highs in the market was not strong enough to combat the increased buying pressure and the market fell into more of a sideways type of congestion on the 5 minute time frame throughout the rest of the morning.



The slower downside, greater degree of overlap in prices, and declining volume which took place as the market corrected into noon were all strong indications that the resistance would give way and another bout of buying would follow. The channel break for the pullback came a bit earlier than the 12:00 ET reversal period and the buying was a bit on the slow side initially, but then increased as the upside move continued. By 12:30 ET the gaps had closed in the Dow Jones Industrial Average ($DJI), S&P 500 ($SPX), and Nasdaq Composite ($COMPX). The buying came to a halt when the gap filled in the Dow and Nasdaq and a little higher at the 15 minute 200 simple moving average in the S&P 500.

Even though the indices pushed through the 15 minute 20 sma initially, that resistance level plagued the market throughout most of the remainder of the day. This moving average was under the closing gap prices, but when the market corrected off that price resistance it was the 15 minute 200 sma that gained its attention. The first wave of selling on the 5 minute time frame coming off the resistance was the strongest. An Avalanche pattern then ensued as the market hugged the 5 minute 20 sma in much the same way as the indices would soon be reacting to their own 20 simple period moving average, except for the fact that the 5 minute time frame was a short setup, whereas it would need to be flipped upside down to be a bullish one.



A second wave of mid-day selling hit at about 13:30 ET as the Avalanche gave way. This time the move was much more stunted than before. After only testing the 11:45 ET lows zone the market again pulled somewhat higher into 14:30 ET. This was a sloppy move with greater price overlap from bar to bar than earlier. Combined with the briefer selloffs, the third was was even more ugly than the second. Volume dropped off more and the indices began to hug the 5 minute 20 sma resistance, as well as the 15 minute one. The trigger on both time frame setups took placing coming out of the 15:00 ET reversal period, but the market never really got too far off its feet before the closing bell rang.

Friday ended with a loss of 31.14 points in the Dow to close at 13,239. The S&P 500 gained a fraction of a point and closed at 1,453. The Nasdaq Composite fell 11.60 points and closed at 2,544. For the weekly gains, the Dow rose 0.4%, the Nasdaq rose 1.3%, and the S&Ps rose 1.4%. Bear Stearns (BSC) was again a big loser, falling 3.4%. My intraday bias heading into the new trading week is somewhat more on the bullish side, but it would not be difficult to put in another slightly lower low on the 60 minute charts first, so I'll be taking it slow again. Volatility is going to remain high.

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.