Market Corrects to Selloff, Holding 20 Day SMA

(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! Thursday was a difficult day for the overall market, even though there were some pockets of strength, particularly in shares traded on the NASDAQ. The morning began on the weak side with all three of the major indices trading lower out of the open. This selling continued into the 10:15 ET correction period. At that point the Nasdaq hit its own 15 minute 200 period simple moving average. This level had stalled selling the day before. It held quite well on the stronger Nasdaq and the market quickly reversed off the morning lows.

Nasdaq Composite ($COMPX)


The upside remained strong into 11:00 ET. The three indices ran into 15 minute 20 sma resistance at this point and slowed, rolling over once again into mid-day. Although the indices remained weak mid-day, they congested along the 15 minute 20 sma. This left them with the potential to push strongly higher if that resistance level managed to break. At first, into the 14:00 ET correction period, it looked as though the resistance level would hold. Buying into it was slower than the previous downside and the correction period hit at the same point as the 5 minute 20 sma in S&Ps and Dow and price resistance in the Nasdaq. Shortly after 14:00, however, the index futures popped sharply higher and busted through the 15 minute resistance.

The S&Ps and Dow continued to have trouble establishing a strong intraday trend throughout the remainder of the day. Even though they both moved higher, there was a lot of overlap in prices on the 15 minute time frame. The Nasdaq had a smoother rally and held the 5 minute 20 sma into the close.

Dow Jones Industrial Average ($DJI)


The Dow Jones Industrial Average ($DJI) closed lower by 27.24 points, or 0.3%, on Thursday at 8,742.46. Approximately half of the Dow's 30 index components closed in positive territory, while the other half closed in the red. Wal-Mart (WMT) had the most difficult time, falling 7.5% after posting larger-than-expected December sales and cuts in this fourth-quarter forecast. Meanwhile, both the S&P 500 ($SPX) and Nasdaq Composite ($COMPX) posted gains. The S&P's gains were modest. It closed higher by 3.08 points or 0.3%, while the Nasdaq gained 17.95 points, or 1.1%.

S&P 500 ($SPX)


Since the indices have formed comparable upside and downside paced moved since last week's lows, the bias for Friday is more up in the air now. The market rounded off at the intraday support on Thursday instead of forming an initial low at the support that then held. This can allow the indices to try to more easily move back into previous highs, particularly in the Nasdaq, but the most likely action will be a continuation of the back and forth chop action into the weekend as the general support zone is hugged into Monday, which would then allow the market to again attempt to move lower into the new week. This is merely the smaller time frame bias, however, and how it plays out will provide a better indication for the larger daily bias. A rapid drop into the 60 minute 200 sma, for instance, would most likely be followed by congestion along that level for up to a week and a secondary move lower into the end of the month.