Over the past week the market has been correcting off this month's highs. The market had established a two-wave pullback on the 60-minute time frame into Tuesday's lows. This created the beginning of a buy pattern on that time frame. The activity from Wednesday upheld this pattern's development despite the downturn off the morning highs and gradual momentum on the upside into the close. What this did create, however, was a smaller 15-minute short setup in the form of a type of Avalanche setup. When the market hugs a support level with a lot of choppy trade, it become easier for that support to break.

The market opened relatively unchanged on Thursday. The channel from the prior afternoon along the 15-minute 20-period simple moving average gave way early in the session. Now, in addition to the larger 60-minute two-wave buy, the market was also forming a smaller setup of the same type on the 15-minute time frame. The drop for the second wave of selling on the 15-minute, however, was not as severe as it had been on the 60-minute. The indices rolled over at intraday lows between 10:00 and 11:00 ET and broke sharply higher at that time.

Whereas the market had stalled on the 60-minute time frame before offering a continuation of the larger buy setup, the indices did not experience any similar misgivings on Thursday and once the pattern triggered it continued to move decisively higher into the early afternoon. At about 12:15 ET the Dow Jones Industrial Average ran into the targeted highs from Friday. The Nasdaq had already tested those highs on Wednesday, so this breakout was from a third test of that resistance level. As many of you may already know, a third test of support or resistance is the one which is most likely to break.

At 12:30 ET the Nasdaq Composite began to correct. Volume dropped off as it slowly pulled back to form a bull flag on the 5- and 15-minute time frames. The S&Ps and Dow also had slowed their ascent at this time, however, they made two more tests of highs into 13:00 ET. Often this pattern will create a larger reversal, however, the market was still dealing with larger time frame bullish patterns. Volume dropped off sharply as the market pulled back slightly into 13:30 ET. Soon afterwards the correction broke higher to trigger another wave of upside on the 5- and 15-minute time frames.

The afternoon breakout was too premature to allow the market to create as strong of a continuation move as the initial late morning rally. It was enough, however, to bring the S&P 500 into its highs from Friday. That resistance hit just before 14:30 ET and all three of the indices rounded off at highs once that occurred. The momentum shift confirmed at 15:00 ET when a slower ascent off the 5-minute 20 sma began, leading to a breakdown in the final 45 minutes of trade which continued afterhours until all three of the major indices had given back a large percentage of their gains off the morning lows. The S&Ps and Dow fell back 50%, while the Nasdaq returned to approximately the 62% Fibonacci retracement level. These support levels held throughout the remainder of Thursday's afterhours trading.

Thursday's primary session closed with a gain of 85.73 points, or 0.7%, in the Dow ($DJI). It ended the day at 12,848.95. American International Group, Inc. (AIG) led the gainers with a 7.09% rally after it lifted its profit forecast for the year. General Motors Corp. (GM) followed with a 5.59% gain following the surprise earnings from Ford Motor Co. (F) (+11.7%). The S&P 500 ($SPX) closed at 1,388.82, up 8.89 points, or 0.6%. The Nasdaq Composite gained 23.71 points, or 1%, and closed at 2,428.92. I am expecting Friday to be another choppy day. A pullback into the lower end of the daily channel again is quite possible by mid-day. Strong upside will be difficult in the indices as a whole.

In economic news on Thursday, the Labor Department announced that first-time claims for state unemployment fell 33,000 to 342,000. This is its lowest level in two months. U.S. durable goods orders gell 0.3% in March. This was as anticipated and February's data was revised higher. Meanwhile, sales of new homes fell 8.5% in March. This hit a 17-year low and was weaker than anticipated.

Dow Jones Industrial Average ($DJI)


S&P 500 ($SPX)


Nasdaq Composite ($COMPX)


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.