The market took quite a plunge on Friday on the 20th anniversary of Black Monday after teasing about such a move for several weeks. On both Wednesday and the previous Thursday the markets had experienced sharp intraday selloffs, but in both cases the indices managed to recover rather well. On Friday, however, the downside pace increased dramatically and key daily support levels gave way. The Dow Jones Industrial Average led the decliners by rounding off at the daily highs over the course of the past several weeks and then slowly beginning to sell off with last Thursday's steep reversal. At the same time, the Nasdaq Composite had managed to hang onto most of its gains and base at highs, but it was unable to sustain any of the intraday momentum on the upside. Even though it continued to hold the 20-day simple moving average support into Friday, it has broken the uptrend channel line from the buying which had been in place since mid-August.



Heading into Friday's session, things became rather dismal early on. The 1540 level in the ES, which was the initial 15-minute support zone, broke around 9:00 am ET, just prior to the open. Then it fell into the 1536 zone, which was the second support level we were looking for heading into the day. This zone held initially for a couple of minutes, but the momentum into the support level was simply too strong and it soon gave way to more selling. The continuation pushed the Dow and S&Ps through Wednesday's lows to trigger a larger short setup on the daily time frame. The Nasdaq, which had held up a lot better overall had found initial support at Thursday's lows, but as the Dow and S&Ps moved to new lows on the week, the Nasdaq fell into the lows made earlier in the week and that support helped stall the price decline into noon.



It was 11:00 ET when the market pivoted off mid-day support initially. The Nasdaq held this level, but the weaker S&Ps and Dow managed a very slightly lower low into 11:30 ET. A pull off those lows created a form of double bottom trap called a 2B. The Nasdaq also formed a bullish pattern on the 5-minute time frame. In this case it is a pattern I termed the Phoenix, although in this case it didn't rise very far from the ashes before it got a bit scorched again! The market rounded off at mid-day highs, just under the 15-minute 20 simple moving average, and by 13:00 ET the bears had already begun taking charge once again. The afternoon trading was smooth to begin with, but as panic set in the action became a lot more choppy and volatile.



Although the Dow did not quite hit the 508-point loss of Black Monday, it gave it a shot in terms of the absolute point value of Friday's decline. All 30 of its index components closed in the red. The Dow closed lower by 366.94 points (-2.6%) on Friday at 13,500.02. It's biggest loser was 3M (MMM), which lost 8.6%. Of course, in today's market, the drop of 20 years ago would have had to have been about 3,000 points to truly compare, so we still faired well in that regard! Meanwhile, the S&P 500 fell 39.45 points (-2.6%) and closed at 1,500.63 on Friday and the Nasdaq Composite also lost 2.6%. In terms of points, this amounted to a 74.15 point drop. It ended the day at 2,725.16.

As we head into the new week, this bearish phase of the market looms. In the past, most days which are led by selling and then experience a sharp decline such as this will recover to some extent into the next session. There are exceptions though, such as July 13 and 14 of 2006 where the Dow had begun to sell off just over a week earlier but then accelerated coming out of a downside gap on the 13th. The session closed nearly lows and then went on into the prior daily low in the next session. In the Dow Jones mini-futures this amounts to the 13200 to 13400 zone and 1450 to 1475 in the S&Ps, which is a rather large range. The lower end of that support zone will tend to be the strongest. I believe that we can see one more wave of upside on the weekly time frame, however, before this larger uptrend really reverses. Should the market correct off support, the 1525 level would be S&P Emini resistance. Right now that is not looking too likely though.

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.