I know what you are saying... The market closed quite a bit higher on Friday, with gains of 233.30 points (+1.8%) in the Dow Jones Ind. Average ($DJI), 34.67 points (+2.5%) in the S&P 500 ($SPX), and 53.96 (+2.2%) in the Nasdaq Composite ($COMPX). Given that the highs of the day on Friday were shortly after the open following the Fed's surprise rate cuts of 50 basis points, why would I then say that the move may have had very little effect upon the market? It seems like a simple case of cause and effect. I disagree.

The market established a fairly strong downside exhaustion day on Thursday. Volume hit record highs and after strong selling throughout the morning the indices bounced back sharply into the close. A reversal like this on substantially higher than average volume will typically see more upside following through into the next trading day. Did the Fed help things out? Sure. The market had not been doing much at all in the premarket before the Fed news hit. Then shortly after 8:00 am ET the news hit the wires and the futures surged. I believe that what this news did was simply let the buyers gain a hold earlier than they would have otherwise, but that they still would have gotten their on their own.

Unfortunately, the result of the premarket move is that it did circumvent the momentum the indices had been building into the day and left it wondering just what to do once the opening bell rang. Those who would have otherwise been willing to view Thursday's close as a buy opportunity into the next day were nervous by the gap higher after so much weakness and volatility. The open itself took place into a great deal of resistance on the 15-minute charts. In the Dow and S&Ps it was the 15-minute 20 sma, while it was also price resistance from earlier in the week in all three of the major indices.



Typically a larger-than-average gap in the overall market will close on the morning of the gap, or at least into the early afternoon, in at least one of the three indices, if not all of them. It's very difficult for the market to continue to move in the direction of the gap past the first 15 minutes of the day. It is true that the extreme upside gaps can hold better than the downside ones in the indices, but the bias still remains in favor of a closure of the gap. Friday's trading was a great example of the rule as opposed to the exception. By the 9:45 ET reversal period the bears had begun to regain control and the market swiftly turned and began to head lower.

This initial wave of selling on the 3- and 5-minute time frames experienced the sharpest momentum. A second continuation took place coming out of the 10:15 ET correction period. This one broke to a lesser degree, but a second base or correction followed and a third wave of selling closed the gap zone in both the Dow, as well as the Nasdaq. There was also price support in the S&Ps at this time, and the Dow hit its 5-minute 200 sma support. All of these came together with the 10:45 ET correction period and since typical trend moves last 2-3 waves, this meant the trend intraday was now exhausted as well and due for a larger correction intraday off the support.



When the market did turn, it was a choppy reversal. The momentum picked up, but it didn't sustain itself. The descent off the morning highs was simply too strong to allow for a rapid reversal and although the market went for a continuation at 11:30 ET, it didn't make it past some of the early congestion levels from the intraday downtrend and the overall upside was quite a bit weaker than the decline had been. This allowed the market to move lower at a more rapid pace into the 12:00 ET correction period, even though it held the support from the price congestion between 11-11:30 ET.

The pattern which developed mid-day on Friday was one of my favorites. After the sharper pullback, the indices moved fairly well to take back more than 50% of the losses from the 11:45-12:00 ET move. The lighter volume during this action then declined further as the market based and the 5-minute 20 simple moving average served as support. When this base or slower pullback breaks higher it triggers a buy. This took place out of the 13:00 ET correction period on Friday and led to another nice daytrade or scalp move higher.



Despite the buy setups, the larger trend was still slower than average and much slower than the morning drop. This more gradual pace continued throughout the remainder of the day. After the early afternoon breakout, another correction followed with the market pulling back a bit more quickly into the 14:00 ET correction period and then slowing to form a longer correction until about 15:00 ET. Once again this correction period held as well and another move higher on the 5 minute charts took the Nasdaq nearly back into the opening price levels on both the Dow and S&Ps where they held throughout the remainder of the day.

I am expecting the bulls to again attempt to peek their heads out on Monday, however the typical action following a daily move such as we have seen over that couple of weeks would be for a narrower range to occur with a lot of indecision intraday. Barring news, an upside gap would be common. Morning upside intraday, however, can more easily give way to a reversal in the afternoon. The 20 day sma will be strong resistance.

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.