Market Volatility Remains High in the Midst of Earnings Season
(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)
Good day! The market was quite a mess on Thursday. The smoothest trading of the day came in the morning. The indices had gapped up into the open after steadily recovering throughout afterhours trade following the late afternoon plummet into Wednesday's closing bell. Premarket news on the economic front helped return the index futures to the highs of the wee morning hours. They had hit highs around 3:00 am ET at Wednesday's upper resistance levels and were trading at the lower end of a trading range when the Commerce Department announced that, while the U.S. economy contracted the most it has since the end of 2001, the 0.3% decline in the real gross domestic product was 2/5 less than anticipated. In other news, the Labor Department stated that jobless claims remained steady last week, while the number of new claims had been expected to fall following the bounce two weeks ago.
Nasdaq Composite ($COMPX)

Due to the daily resistance and the pace of the upside move into that resistance this week, I did not have a strong directional bias heading into Thursday's session. The price resistance at the highs from several weeks ago meant that the market would have a more difficult time pushing forward, but the pace of the upside was stronger-than-average. This meant that it would also have a difficult time turning lower quickly and sustaining a rapid downside move. This left it in limbo and it did a decent job of playing out that uncertainty throughout a large portion of Thursday's session.
The early morning price resistance from Wednesday's highs, coupled with the size of the morning gap, made it easy for the market to take a bearish bias on the smaller time frames throughout the morning. The indices rolled over at the highs and broke down with the 10:15 ET correction period. A second wave of selling continued the move out of the 11:15 ET correction period, leading an attempt to close the morning gap.
Dow Jones Industrial Average ($DJI)

When the indices hit equal move support on the 5 minute time frame (shown in blue) the selling ended. The market began to climb higher into the afternoon, but the momentum was weak. The initial bounce off lows did not last more than a few minutes before the indices started to struggle. Even though they continued higher into the 15:00 ET correction period, eventually retaking the zone of the morning highs, the slow pace of the upside and the relatively light volume left the market wide open for rapid downside flushing action. This took place early on in the final hour of trade, bringing the indices back to mid-afternoon price support zones before recovering into the close. Although the market was able to return to the level of the day's highs, the larger daily resistance held and the afterhours action was fairly uneventful heading into midnight.
S&P 500 ($SPX)

The Dow Jones Industrial Average ($DJI) closed at 9,180.69 on Thursday with a gain of 189.73 points, or 2.1%. 25 of the Dow's 30 components closed in positive territory. Among them were Intel Corp. (INTC) (+8.23%), Hewlett Packard Co. (HPQ) (+6.47%), and Disney (DIS) (+5.67%). General Motors (GM) dominated the losers by falling 10.21%, while Microsoft (MSFT) shed 1.61%.
The S&P 500 ($SPX) rose 24 points, or 2.6% on Thursday and closed at 954.09. Energy, utilities, and industrials were the leading sectors. Each of the S&P's 10 industry groups posted gains. The Nasdaq Composite ($COMPX) rose 41.31 points, or 2.5%, and closed at 1,698.52
By establishing a series of slightly higher highs on the 30 minute time frame over the past two days at strong daily price and moving average resistance (20 day sma), the market is at risk of downside flushing action, comparable to what took place in the final hour of trade on Thursday. If they can manage to break the upper end of the price channel from the past two days, however, then it is a clean shot into the highs of October 14th for the next larger time frame resistance level. At this point either scenario can play out, just depending upon the pace of the action on Friday in the indices.
Slower downside will make it easier for the upper end of the range to break, while a sharp drop lower in the morning can more easily lead to a larger break lower on a continuation. I am leaning, however, towards a greater chance that even an initially strong pullback into Friday can easily be followed by a second, more gradual one, which can then lead to a two-wave continuation buy pattern on a 15 minute time frame to push the market through that upper resistance of the past several days.



















































