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The market made a strong run through Wednesday, but then gave it all back yesterday. The Standard and Poor’s 500 Index (SPX) closed at 2831, down 82 or 2.8%, but was only down 0.8% for the week. SPX gapped open lower Friday morning and traded weakly all day. Trading volume for the S&P 500 companies ran at or below the 50-day moving average (dma) all week and Friday’s trading volume came in at 2.9 billion shares, well below the 50 dma at 3.8 billion shares. This gives us some slight reassurance about this disappointing day in the markets. Just as a strong bullish day is reinforced by strong trading volume, a weak market characterized by above average trading volume would be a more serious concern.

VIX, the volatility index for the S&P 500 options, spiked upward today to close at 37.2%. VIX opened the week at 36.3% and declined to a low Tuesday of 30.5% before rising on Thursday and gapping open higher today. This relatively high level of volatility underscores the fact that the large institutional players remain on edge.

IWM, the ETF based on the Russell 2000 group of companies, gapped open lower Friday morning and closed at 125.14, down 3.1%. IWM broke out above its 50 dma on Tuesday and bounced off that support level intraday on Friday. 124 is also a strong support level set on March 11th. When the Russell 2000 stocks broke out above the 50 dma, this was strong reinforcement of bullish sentiment. The fact that IWM held support at the 50 dma yesterday is somewhat reassuring on an otherwise bearish day.

The NASDAQ Composite index gapped open lower Friday and closed at 8605, down 3.2%. NASDAQ was the first broad market index to recover its 50 dma, breaking it first on April 14th, testing it on April 21st and continuing to hold well above the 50 dma yesterday.

I drew support levels on SPX, IWM and NASDAQ based on the points where the market bounced but then continued lower shortly thereafter. It is fascinating to see how well those levels have acted as support and resistance in the thirty days since we saw the worst of the correction in late March. On the S&P 500 chart, the current index value is running between the lower level around 2745 set on March 9th and the upper level at 2974 set on February 27th. Similar patterns exist on the charts for IWM and NASDAQ. I conclude that the market is searching for a market valuation that will make sense once the dust settles. But that is a tall order loaded with uncertainty. I expect we will continue to see some choppiness for some time. There is no doubt that the depths of the correction resulted from panicked traders. But predicting the stable market level after all of this economic damage is difficult or impossible at this point. The market will continue to spike in both directions on the basis of even the silliest of rumors.

This market will continue to fluctuate widely based on daily news and rumors. The rather high levels of volatility should remind us that this market is far from stable. The elevated volatility of this market enables unusually large returns from normally conservative trades like covered calls. High volatility correlates with high potential gains, but those gains are always accompanied by higher risk. If you decide to take advantage of this increased volatility, take small positions and place your stops aggressively. Stay calm and remain disciplined.