On Thursday the market gave in to a second wave of selling on the daily time frame since the October 11 highs . That bias continued into Friday morning with continued downside after a minor gap higher into the open. The financial sector was particularly burdened. In the broker/dealers, Merrill Lynch & Co Inc. (MER) saw its worst intraday decline since February after breaking lower on October 19 out of a multi-month base near 52-week lows. At one point MER was down about $8, but it managed to recoup some of its losses to close down $4.91 (-7.9%). Morgan Stanley (MS) also had a tough day. It fell $3.52 (-5.64%) on Friday after already getting hit hard the day before. Goldman Sachs Group Inc. (GS), which had just hit new highs two days earlier, shed $10.61 (-4.42%). The banks failed to hold up also, with a -7.5% loss in Washington Mutual Inc. (WM) leading the decliners. Only a couple stocks in this sector managed to post gains.

Despite these damages, the overall market did manage to make a recovery as the day progressed and even succeeded in posting gains. The Dow Jones Industrial Average ($DJI) rose 27.23 points (+0.2%) and ended the session at 13,595.10. It had fallen 1.5% from the previous week. The S&P 500 ($SPX) gained just over a point with +1.21 (+0.1%). It closed at 1,509.69 for a loss of 1.6% on the week. The Nasdaq Composite ($COMPX) rose 15.55 points (+0.6%). It finished the week at 2,810.38, which was nearly unchanged from the previous Friday's close.

The sectors which succeeded in posting gains and holding up the overall market were the oil and gold sectors. Nearly all the top NYSE gainers fell into one of these sectors, or one closely related, such as energy. The top symbols were WDC, WCG, ABX, RIG, SLB, APA, WFR, WLT, CF, and FLS. The Nasdaq winners included RIMM, BIDU, GOOG, UTHR, SYNA, RSYS, SBAC, FMCN, CGNX, WMGI, and ONXX.



After falling sharply lower out of the open on Friday, the market began to stabilize around 10:00 ET. The buyers did not jump back in immediately, but the indices began to round off at the morning lows at that time. The Nasdaq Composite had hit its 20-day simple moving average for support and the S&Ps and Dow were testing support zones from over the past couple of months. After some slightly lower lows, the indices began to ease higher around 10:15 ET. The Nasdaq recovered quickly and was soon in positive territory again, albeit still off the highs, while the S&P 500 and Dow Jones Industrial Average at least returned to Thursday's closing prices. These hit at the same time as the 5-minute 20 simple moving average, which corresponded to the Nasdaq striking resistance at its 15-minute 20 sma. The result was that the buying stalled.

The market retested the morning highs about 90 minutes after the first lows were made. The selling was not as steep as before, nor did it have as far to fall. The larger daily support combined with the support from the morning lows and the more gradual momentum overall on the decline allowed the market to hold those lows and once again attempt another recovery. Resistance hit again at noon, but instead of falling off those price levels, the market held and the indices congested there on declining volume. I had expected the range to hold a bit longer than it did, but it broke out rather quickly around 12:15 ET. The result was that instead of moving quickly into the morning highs, the market chopped higher at a slower pace and with a great deal of overlap from bar to bar on the 5-minute time frame.



The indices hit the zone of morning highs around the same time as the 13:00 ET reversal period. Within minutes they were hugging the lower end of the uptrend channel, suggesting that finally the trend would correct and give way to a pullback. Even though this bias followed through, the trading was even more choppy on the pullback off the highs than the run into them. The market crept lower on somewhat declining volume, but without any real conviction. The pattern for the breakdown was essentially an Avalanche, but the base for the pattern had a downward tilt to it with slightly lower highs and lows until breaking that congestion around 14:30 ET with a bit stronger momentum back into earlier price congestion and the 15:00 ET reversal period.



When the 15:00 ET reversal period hit, the buyers returned. There was a little hesitation again to begin with, but within 15 minutes the momentum had increased. The market first returned to the congestion zone from the Avalanche area and then based, forming another brief range before pushing higher into the close. This time it was the lagging S&Ps and Dow that led the way and the indices all closed with gains. The Nasdaq ended the session approximately where it opened from the gap and the S&Ps and Dow nearly managed to as well.

While the market is at strong support on the larger intraday time frames and stands a decent chance of Friday's lows holding to begin with this week, I expect the gap level from Wednesday's close to serve as strong resistance, and my larger daily bias at this time is for further selling over the next couple of weeks. In order for this bias to continue, I want to see a more gradual, choppy correction continue off this support early this week. This would create higher odds for a descending triangle to trigger a short on the daily time frame in the S&P 500 and Dow. It is reasonable to expect the Nasdaq to continue to perform somewhat better than the rest of the market, but when selling does hit, it will then have more room to fall than the others.

Events impacting the week ahead include a continuation of earnings season as well as a couple highly-followed economic reports. As far as earnings season goes, while it has come in pretty close to expectations in terms of how many beat earnings, how many fell in line with earnings and how many fell short, many of the companies that beat their anticipated earnings did so by relatively small amounts. Without a lot of excitement, it opens the door to larger corrections on the monthly time frames. Economic events to keep an eye on will include Monday's ISM Services report, monthly retail sales, same-store sales, and Friday's University of Michigan's consumer sentiment survey.

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.