Triangle or immediate continuation? That was the question posed over the past couple of days. As the market opened on Wednesday it was obvious that the market had made its choice. In order to hold a triangle pattern and pull back up into the 20-day simple moving average before falling again, the indices needed to have continued higher on Wednesday morning. Instead, the afterhours selling that we had our eyes on heading into midnight on Tuesday picked up strongly in premarket trading.

At about 4:00 am ET the market plummeted after a top official in China urged the country to diversify its foreign-currency holding, such as the euro, which had risen to $1.4730. After the rapid descent, the index futures held a range into the open. The action was extremely close to what occurred in Monday's premarket trading. The initial outcome was also the same. The market consolidated into the early afternoon with gradual upside on Monday, but on Wednesday this gradual upside correction did not take as long. Previous 15-minute highs served as Nasdaq ($COMPX) resistance, while the 5- and 15-minute 20 simple moving average held as resistance in the Dow Jones Industrial Average ($DJI) and S&P 500 ($SPX) on Thursday, leading to a more rapid onset of the breakdown out of the pattern than before.



In contrast to Monday's afternoon selloff, the action on Wednesday was also much more extreme. The 10:15 ET reversal period held and the market began to fall off the intraday resistance. At first it seemed harmless enough, until one stepped back and looked at the 30-minute time frame and noticed that the momentum within the week's trading range had once again shifted in favor of the bears. The 10:15 ET breakdown was earlier than was ideal compared to the extent of the gap, however, and the market fell into another range heading into noon to compensate. Volume declined as the bulls backed off and the bears waited.



At the 12:00 ET reversal period the dam broke and the selling resumed. It was still somewhat hesitant at first, but another congestion level into 13:00 ET was rewarded by a strong downside flush at 13:15 ET. This took the Dow to new lows on the week and brought the Nasdaq Composite into support at Tuesday's lows before attempting to correct again on the 15-minute time frame and not merely on the 5. The 5-minute 20 sma served as initial resistance, but the market congested along that resistance to form a Phoenix buy setup out of the 14:00 ET reversal period. This took the indices back to the 15-minute 20 sma resistance. These two-wave corrections are typical within a larger downtrend and the selling resumed into 15:00 ET, but retraced slightly before it completely fell apart in the final 45 minutes of trading.



At the time of the closing bell, the Dow had fallen another 360.9 points (-2.6%). Every single one of the companies which comprise the index saw their stock's value decline. The index closed at 13,300.02. American International Group (AIG) was among the hardest hit ahead of its afterhours earnings report. It fell 6.7% on the day. General Motors (GM) came in close with a 6.1% decline following third-quarter losses. American Express (AXP) lost 5.5%.

The S&Ps and Nasdaq also suffered heavy losses. The S&P 500 fell 44.65 points (-2.9%) on Wednesday. It closed at 1,475.62. The Nasdaq Composite lost 76.42 points (-2.7%). It ended the session at 2,748.76. Volume was again on the heavy side with almost 1.7 billion shares exchanged on the NYSE and 2.7 billion on the Nasdaq. In the NYSE the decliners exceeded advancers by 3 to 1, while on the Nasdaq the declining stocks outpaced the advancing ones by more than 5 to 1. The selling did not end there. The market continued to fall in afterhours trading as well. This leaves the door wide open for a retracement in the Dow back to the 13,000 level with the market easily testing the price congestion from August and early summer.

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.