Good morning! I hope that you have had a wonderful holiday season! The New Year has certainly gotten off to a rough start! As you may recall, we have been watching for a breakdown into the New Year. Originally I had been expecting a retest of the previous highs from late October/early November, but the Fed threw in a bit of a curve ball in early December, leading to some earlier weakness and holding the indices down by only granting the lower end of the expected rate cut with a 25 basis point cut instead of the 50-point cut many had been looking forward to. The result was more of a congestion zone as the market continued to correct off early November lows as opposed to a stronger price correction higher off those lows. Now the market is looking even lower, although as we head into the new week we do have price support that can stall the breakdown for a few days.



This past week of trading was very similar to the action which took place in mid-October in the S&P 500 ($SPX) and Dow Jones Industrial Average ($DJI) other than the fact that the market is at a different place in the larger trend. Nevertheless, the similarities are enough to influence the market over the next week. Friday's flush after selling gradually increased throughout the week leaves the door open for some slightly lower lows on Monday, but then corrective action is most likely, whereby selling stalls for a few days at least.



Friday's climactic selloff began with a strong downside gap after a very narrow trading range on Thursday which continued the intraday range from the prior afternoon. The gap created the trigger for a breakdown from a strong trading range on the 30-60 minute time frames. Since this also triggered a daily 1-2-3 continuation pattern, the gap held rather easily and the indices moved lower right out of the open before basing and continuing lower into the 10:15 ET correction period.

The market continued to sell off until the 11:00 ET correction period. At that point the Nasdaq was running into its November lows, and the indices were hitting equal move support intraday as compared to the drop on the morning of the 2nd. While the market headed higher over noon, the volume declined. After hitting the 5-minute 20-period simple moving average, the momentum on the upside also dropped off. The market had congested along the resistance and broke higher with the 12:00 ET correction period, but it failed to confirm the breakout with either an increase in pace or in volume. Hence, this second wave of upside mid-day easily broke lower into the early afternoon. As 12:30 ET the market then began to base, creating a classic short pattern on a 15-minute time frame which triggered initially into 13:30 ET and then increased into the 14:00 ET correction period.



The afternoon breakdown in the market quickly mimicked the move into the mid-day congestion. Equal move support hit on the 5-minute time frame going into the 15:00 ET correction period. A small bear flag on the 5-minute charts followed with another two waves of upside correction prior to the breakdown into the close. The resulting breakdown led to a close right in the zone of the day's lows. The loss amounted to 256.54 points (-2%) in the Dow with a close at 12,800 and a 35.53 point loss in the S&P 500 (-2.5%). It closed at 1,411. The Nasdaq Composite had the greatest difficulty following downgrades in semiconductors. It fell 98.03 points, which translated as a whopping 3.8%. It closed at 2,504. The weekly results were losses of 4.2% in the Dow, 4.5% in the S&Ps and 6.4% in the Nasdaq.

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.