Market Holds Daily Support and Rallies Sharply

(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 index futures broke sharply higher at midnight after a weak reaction to Wednesday's Fed data. After that initial surge into the start of the new day, however, things were soon heading back the other way. They rolled over at the highs and started a series of downside move into the open. The Labor Department did not help by stating that initial jobless claims rose 15,000 last week to 627,000. Economists had anticipated a drop. Continuing claims also rose by 29,000 last week. In other news, the Commerce Department reported that the gross domestic product contracted at a pace of 5.5% in the first quarter. This is its second revision and was better than the 5.7% that had been expected. Initially the government reported a 6.1% first quarter decline.

Earnings data also had an impact on Thursday. Lennar Corp. (LEN) jumped 17% after posting a larger quarterly loss than expected, but a 63% increase in orders. The news helped boost other housing-related stocks as well. Retailers were also quite happy. Bed Bath & Beyond (BBBY) rose 9.5%. It reported earnings on Wed. after the close. Palm (PALM) shares were trading in a range as it held the 20 day sma, but climbed by almost 14% afterhours Thurs. following earnings that were substantially better-than-expected, albeit still a loss.

Dow Jones Industrial Average ($DJI)


Even though the market did open lower on Thursday, the indices had also formed three waves of selling in the premarket. This exhausted that early morning trend move on the 5 minute time frame and opened the door for a potential reversal into the open. The market didn't seem to need much incentive, however, and began to head higher almost immediately.

I was not convinced heading into Wednesday's close that the market would be able to continue strongly on the upside right away, and thought that it might take until Monday before we saw a decent bounce. Even through the Dow and Nasdaq had hit larger daily support, the S&Ps were still a bit shy, which meant that the previous month's lows still have the potential to draw the market in. It became obvious within the first 30 minutes of the session on Thursday, however, that this was not going to be the case. The upside momentum increased too quickly to allow for any decent short to setup that would take the S&Ps into that stronger test of lows. Instead, the market formed a series of higher highs with bull flag action into the early afternoon.

S&P 500 ($SPX)


The first rally of the day was extreme in the Nasdaq, which left this index more extended than the others, so when a bull flag formed into 11:15 ET, the S&Ps and Dow had the best relative follow-through. This was repeated with another pullback into 5 minute 20 sma support at 13:00 ET. This correction period held well, but the extension on the indices themselves prevented the move from repeating past glory and it had to settle for slightly higher highs. The pace did not really roll over much past that point though. The 5 minute 20 sma broke and the indices attempted to form a 5 minute Avalanche™, but the drop into the base at 14:00 was not quite strong enough and the base was a bit too long to sustain a decent continuation on the downside and the market pulled back higher in the final 25 minutes of trade.

Nasdaq Composite ($COMPX)


The Dow Jones Industrial Average ($DJI) rose 172.54 points, or 2.08%, to close at 8,472.40 on Thursday.American Express (AXP) led the gains with a rally of 6.59%. It was followed by Alcoa (AA) with a gain of 5%, Merck (MRK) with a gain of 4.4%, and Pfizer (PFE) with a gain of 4.14%. Bank of America (BAC) was the only component to not post a gain, but it was unchanged despite a day in which Fed Chairman Bernanke testified regarding the Bank of America deal to purchase Merrill Lynch last fall. BAC CEO has recently cried foul over the deal, claiming pressure from the government to go through with the purchase. The Fed is now moving to scale back several of the emergency lending programs that were begun this past fall.

The S&P 500 ($SPX) rose 19.32 points, or 2.14%, and closed at 920.26. Crude oil futures rose 2.3% from $68.67 to $70.23 a barrel.

The Nasdaq Composite ($COMPX) rose 37.20 points, or 2.08%, and it closed at 1,829.54 on Thursday.

Despite the gains made on Thursday, I don't see a way for the market to sustain its current uptrend on a daily time frame for much longer. Even if the indices make it back to highs coming off the current daily support, it will be extremely difficult to push strongly past them without a larger weekly correction. The rounded off at highs seems destined to continue over the next several weeks and I am going to remain on the sidelines for the most part in terms of longer time frame investments. I saw an article Thursday morning that Warren Buffett remains unconvinced as well. In his own annual report he has stated that he expects the economy to remain "in shambles this year and probably well beyond." I like his phrasing ("shambles") better than what I had been using, but my sentiment in the longer term remains the same as well. I have done a few short-term holds (1-3 months) since the market hit lows, but I don't have many positions that I am strongly building in stocks for longer term at the moment and am keeping a greater portion in cash than I have in the past decade.